2024 Halving Report

Bitcoin is the Best Money

Bitcoin is different from all other assets (crypto and traditional) due to its unique property of immutable scarcity.

Unlike other commodities, Bitcoin has a predetermined algorithmic supply schedule that cannot be changed.

No matter how many miners join the network, there will never be more than 21,000,000 BTC.

Immutable, Absolute Scarcity

However, when juxtaposed, Bitcoin posses far more desirable attributes:

1. Bitcoin is absolutely scarce while gold is only relatively scarce.
2. Bitcoin is more portable, divisible, fungible, and is less vulnerable to rehypothecation by centralized custodians.

After the 2024 halving, the inflation rate of Bitcoin will fall under 1%; which is less than half that of gold.

Bitcoin is Highly Cyclical

There are multiple factors contributing to the cyclical nature of Bitcoin’s price, including network adoption and the macroeconomic environment, but the most impactful is the mining subsidy halving

Bitcoin’s market cycles are unique due to its fully transparent blockchain; providing market participants with more granular information than any other asset class. Moreover, the predictable supply schedule further impacts the psychology of market participants, ie. demand.

For more information on the non-halving factors impacting Bitcoin’s cyclicality, check out this previous Blockware report on the topic.

Stage 1 (Halving)

• Initial sell pressure as weak miners liquidate BTC to fund their operations.
• Sell pressure is relieved as weak miners go offline and difficulty adjusts downwards.

Stage 2 (Bull Market)

• Higher percentage of supply accumulated by efficient miners and long-term holders.
• Positive feedback loop: Higher price → attention on BTC from investors → greater demand → further price appreciation → blow off

Stage 3 (Bear Market)

• Increased price → increased mining profitability → more miners coming online → higher difficulty → increased sell pressure to cover operating expense
• Capitulation from short term holders and unprofitable miners

Stage 4 (Recovery)

• Price support established after weak miners capitulate as long term holders accumulate

Halvings reduce sell pressure

Every 4 years, the amount of new BTC released per block gets cut in half. This occurs until 2140 at which point no new BTC are mined.

Miners are the primary force of sell pressure on the price of Bitcoin. They receive all of the newly issued Bitcoin, a majority of which they must sell in order to fund operating expenses for their mining operation.

Many market participants speculate on the future of Bitcoin, but one thing is certain: every four years the block subsidy will be cut in half, leading to a material reduction in the quantity of BTC being sold into the market.

The weakest miners on the network are eliminated and sell pressure is significantly reduced. The price of BTC begins drifting up, and a new wave of adoption then begins.

Halvings bring new demand

With supply being diminished, demand is the only remaining variable determining the market price of BTC.

Many market participants understand the supply-side dynamics at play due to the halvings. Historically, this has led to a surge in demand in the months following each halving, as evidenced by on-chain data.

Due to the positive sentiment market participants prepare to deploy capital at the first sign of upward momentum.

Decreased supply + increased demand = strong positive signal for price appreciation.

Halvings cannot be “priced in”

Despite their predictable nature, halvings cannot be fully “priced in” before they occur. A higher price today would result in more miners coming online, introducing additional sell pressure, limiting price appreciation.

Moreover, the weakest miners, those with old-generation machines and/or high operating costs, are the first to unplug post-halving. The elimination of these miners significantly reduces sell pressure; as they were selling most of their BTC to fund their operations.

Lastly, there are some market participants that believe halvings are bad for the security of the Bitcoin Network as the diminishing block subsidy reduces the amount of miners, making Bitcoin more vulnerable to an attack. When halvings successfully occur these doubters are proved wrong and positive sentiment increases.

Pre-Halving

Weak miners (least efficient rigs and/or highest energy rates) are operating close to breakeven; selling most of their BTC to cover operating expenses.

Strong miners are operating with healthy margins.

Pre-Halving

Weak miners (least efficient rigs and/or highest energy rates) are operating close to breakeven; selling most of their BTC to cover operating expenses.

Strong miners are operating with healthy margins.

Pre-Halving

Weak miners (least efficient rigs and/or highest energy rates) are operating close to breakeven; selling most of their BTC to cover operating expenses.

Strong miners are operating with healthy margins.

Pre-Halving

Before the 2024 halving all miners will be operating at a profit but are likely selling at least enough BTC to cover their operating expenses.

Many miners are operating at near breakeven prices with the hope that the BTC price immediately increases after the halving, which is unlikely to happen.

Pre-Halving

Miners with the most efficient machines and the lowest energy rates have the lowest Bitcoin breakeven prices.

Miners with high breakeven prices are either unprofitable, or forced to sell a high % of the Bitcoin they mine in order to cover their operating expenses.

The chart to the right depicts the breakeven prices of miners based on machine type and electricity rate prior to the 2024 halving.

Pre-Halving

A majority of the network consists of Antminer S19 (or equivalent models) in the 6-8 cent per kWh range.

Prior to the halving, these miners need to sell over half of the BTC they mine in order to cover their operating expenses.

This cohort of miners will be under the most pressure once the block subsidy is cut in half.

* Size Adjusted for % of Total Network Hashrate

Post-Halving

After the 2024 halving many miners will become unprofitable.

Since miners have already made significant capital expenditures on mining infrastructure and are locked into energy contracts they are unlikely to turn off immediately. Instead they will try to continue operating for as long as possible hoping BTC increases enough to make them profitable again.

Post-Halving

The chart to the right illustrates what the network may look like in the immediate aftermath of the halving, prior to capitulation from unprofitable miners.

Unless BTC price appreciates quickly, the extreme margin compression will begin to force inefficient miners offline.

During this time, weak miners will be selling all of the BTC they mine in an attempt to survive before exhausting their treasury and ultimately shutting down.

Post-Halving

The halving will likely disrupt the largest portion of the network: S19s with 6¢, 7¢, or 8¢ kWh power rates. With a block subsidy of 3.125, their breakeven prices will jump to $37k, $43k, and $49k, respectively.

The capitulation of this cohort will likely occur over multiple difficulty adjustment periods as inefficient miners hang on for as long as they can.

Size Adjusted for % of Total Network Hashrate

Post-Capitulation

As the inefficient miners capitulate, mining difficulty adjusts down and the most efficient miners get rewarded with more BTC.

After the weak miners have been removed from the network the margins improve for the remaining miners which reduces sell pressure.

Post-Capitulation

Following the capitulation of inefficient miners, difficulty will adjust down, lowering the breakeven prices for surviving miners who will become even more profitable.

During this time, opportunities will present themselves as mid-generation mining rigs will likely be heavily discounted as miners seek to upgrade to the newest, most profitable ASICs.

For those seeking a low CapEx entry into Bitcoin mining, purchasing in the aftermath of the halving, before the bull market, has been a winning strategy historically.

Post-Capitulation

Following the capitulation-induced drop in mining difficulty, S19s at a 7 cent rate will become (barely) profitable again. 8 cent S19s will be just out of reach with a breakeven of ~$37k.

The most likely scenario is a series of highly volatile difficulty adjustments, both up and down, as the market searches for an equilibrium under a 3.125 block subsidy.

Size Adjusted for % of Total Network Hashrate

Sell Pressure Removed

Assuming a $35,000 BTC price after the halving, the USD value of Bitcoin mined per year could drop from $11.5B to $5.7B.

That is 164,250 BTC less mined every year, more than Microstrategy’s entire Bitcoin treasury.

Based on previous a Blockware Intelligence Report using public miner investor relations resources, Coinshares Research, and Blockware Research.

Sell Pressure Removed

After the inefficient miners capitulate, the profit margin increases for surviving miners which further reduces sell pressure.

Based on the post-capitalization hashrate estimate, this would result in $2.3B reduction in annual sell pressure from miners.

Based on previous a Blockware Intelligence Report using public miner investor relations resources, Coinshares Research, and Blockware Research.

High Volatility of Bitcoin Cycles

Bitcoin’s extreme volatility is a side effect of its halving shocks and rapid global adoption, resulting in four distinct stages within each halving cycle.

• Stage 1: Halving
• Stage 2: Bull Market
• Stage 3: Bear Market
• Stage 4: Recovery

While Bitcoin is often criticized for its extreme volatility, on a long enough time horizon its volatility is solely to the upside.

Nobody who has ever bought Bitcoin and held it for more than 5 years is down on their purchase.

Approaching 2024

After falling almost 70% during this past bear cycle, Bitcoin is already up 71% during this recovery period in 2023.

Bitcoin is approaching its fourth halving event. It will likely be a catalyst for its next parabolic bull run.

Diminishing Effects?

Some question the bullishness of halvings as the stock of existing BTC grows relative to the amount of new Bitcoin being mined.

This is a common perspective, but it may be incorrect. Less than 10% of existing BTC have moved in the last month. A large majority of BTC is held by users unwilling to sell at today’s price.

The small amount of BTC that is moving and being traded is what determines today’s price. There is a baseline of demand ($ denominated) from Bitcoiners saving for the future. The reduction in sell pressure becomes more pronounced each halving after Bitcoin more than doubles in price.

This indicates that halving induced reductions in sell pressure could become more extreme and potentially lead to larger bull runs in the future.

HODL Model

2024 will be the first halving where the supply of BTC available for trade decreased since the previous halving.

During the Spring of 2020, the percentage of outstanding Bitcoin available for trade was at an all time high, indicating that BTC was becoming more abundant. However, this trend has reversed over the last 3.5 years.

As a new bull market begins there will be less BTC available than previous cycles, the first halving this has ever occurred.

Exchange Balances vs Future Supply

There is currently ~19,426,000 BTC in circulation. That leaves ~1,574,000 BTC remaining to enter circulation via the block subsidy awarded to miners.

During the 2020-2024 epoch ~676 BTC have been taken off exchanges each day. Should exchange balances continue to decrease at this pace, the amount of BTC available on exchanges will be less than the supply available via mining by the early 2030’s

This presents an interesting paradox – despite the block subsidy halvings, mining will likely continue to be the best way to accumulate large amounts of BTC in the future.

Price and Hashrate Projection

Assuming a price of $35,000 at the date of the halving, a $400,000 cycle top would break the trend of diminishing returns; a reasonable expectation due to the $2B halving supply shock and increasing scarcity of liquid BTC supply on exchanges.

Bitcoin vs Gold

$400,000 per BTC would put the market cap of Bitcoin just beneath parity with gold.

Given the bullish catalysts induced by the halving, we believe this is a fair estimate for the top of the coming Bitcoin cycle.

~$8.4 Trillion Market Cap

~$12 Trillion Market Cap

New Generation Mining Rigs

There are two major trends that have fundamentally altered the market dynamics of the Bitcoin mining industry.

1. Bitcoin ASIC efficiency improvements for new generation machines are slowing drastically. This means the next-gen hardware does not immediately make the previous-gen hardware obsolete, allowing today’s hardware to retain its value for a longer period of time.
2. Bitcoin’s network hashrate and the number of rigs hashing continue to grow over time which has caused a large secondary trading market for rigs to emerge. This means there is now more liquidity for used mining rigs, enabling mining rigs to be purchased and sold at a later date.

ASICs are Assets

ASICs are commoditizing, which means today’s hardware is likely to retain its value for a longer period of time.

Rig Marketplace

There is now more liquidity for used mining rigs, enabling mining rigs to be purchased and sold at a later date.

ASIC Commoditization

The slowing growth rate of rig efficiency (J/TH) is due to chip producers reaching the thermodynamically viable limit with current technology. The premier Bitcoin ASIC, the S19XP, has an efficiency of 21.5 J/TH and uses 5 nm transistors, which are incredibly small

If the next-generation ASIC becomes 100 times more efficient, it would quickly render previous ASICs obsolete, forcing miners to upgrade to remain competitive and recoup their investment.

On the other hand, the next generation ASICs not being significantly more efficient means that today’s rigs can remain competitive for longer, preserving their market value and future cash flows.

Self service marketplace for miners
Buy and sell hosted Bitcoin ASICs
View order book of asks and bids

Real time performance data
Auditable energy, hashrate and BTC rewards
Immediate transfer of rig hashrate to buyer’s wallet

Bitcoin native powered by Lightning Network
All transactions are in BTC

• [email protected]
• blockwaresolutions.com/contacts/

Blockware Solutions LLC 3800 N. Lamar Blvd.,
Suite 200 Austin, TX 78756

www.blockwaresolutions.com