the change of mentality of Bitcoin miners before the halving

The cycles established by the Bitcoin halving appear to be driving new dynamics and strategies in the Bitcoin mining industry. Although there are behavioral constants, especially in the last two cycles, there are large variables in the business models that companies have implemented.

If we refer to the growth of the hashrate, an indicator of security and value of the network, which determines the difficulty of mining Bitcoin and the ability of miners to obtain profits, we will have a first guide to understand the changes that will come in this activity. We can notice that a constant is true: the network’s miners tend to connect more and more equipment before, during and after each halving, a scheduled event that reduces the reward (or issuance) of BTC by half.

A look at the past shows us that during the first two halvings, the hashrate doubled in just 6 months before the scheduled event. First it went from an average of 12 TH/s to 24 TH/s in the first halving in 2012; The network then experienced growth from 700 TH/s to 1,400 TH/s when the second one was executed in 2016.

The story was a little different in 2020, when the third halving occurred. The trend of increasing the network hashrate continued, but about 6 months before, growth stagnated in a range that fluctuated between 90 EH/s and 115 EH/s. It would take several months for the network to grow by only 50%, until the Chinese government banned Bitcoin mining, a fact that marked a before and after in the industry.

What paralyzed growth for so many months? The short answer is the shortage of chip supplies, which became a crisis for different industries from that moment on and, to a large extent, until today.

However, the uncertainty that a series of regulations had generated in the Asian country, where the vast majority of mining companies were concentrated, contributed strongly. In other words, There was no point in connecting more equipment to the network when we all knew the possible outcome, which finally forced the miners to migrate to other countries.

Once freed from the power exercised by the Chinese government, many of these companies let themselves be carried away by an overconfidence, a blinding enthusiasm, that would lead them to make increasingly risky decisions in the places and jurisdictions where they took root, mainly in USA.

The last halving and bull run found Bitcoin miners in a country where the lending culture is deeply rooted. In fact, HE esteem that these loans reached 4,000 million collective debt in 2021, when the price of bitcoin recorded its historical records. The result, when the price bubble burst, was a harsh lesson for most.

In reality, loans are common in many growing industries, but in one as changing as Bitcoin they can be dangerous. The proof is that shortly after gigantic loans were granted to buy equipment and boost mining facilities, the abrupt appearance of one of the longest bear markets in the history of bitcoin triggered the bankruptcy of the largest mining company of the time and the dismissal of numerous workers in others.

I recently read a phrase that seems accurate to me: “past performance is not indicative of future results.” However, the lessons of the past can help a little to understand how to act from now on.

A change of mentality

The increase in the value of chips, the increase in the price of equipment and the price of BTC in the markets during the bull run of 2021 conditioned the industry for a long time. However, over the last year Bitcoin miners chose other strategies to stay in business and, in fact, double in that period the amount of computing power or hashrate they invested in Bitcoin, a symptom that competitiveness among participants is maintained and that solutions have been found to invest.

Although several mining companies hit the stock market before 2021, the emergence of new shares from different industry players played a determining role in the way many companies took on the “new business” of Bitcoin mining. In fact, as CriptoNoticias reported, many mining stocks increased up to 400% in 2023, surpassing the 160% increase in the price of bitcoin. In other words, institutional investors or those coming from traditional finance found a valuable and thriving market in Bitcoin mining.

Furthermore, the emergence of Ordinals allowed us to glimpse a future where network fees could sustain the industry, with the understanding that the reward will gradually decrease over time as halvings occur and competition for those BTC grows.

In this sense, numerous miners began to contribute to the development of marketplaces for BRC-20 tokens and Ordinals NFTs, which during 2023 provided the main income for the industry, in addition to being a showcase for developments in that space. For example, from CriptoNoticias we told how one of the main mining companies launched a service so that the creators of NFTs and Ordinals tokens could accelerate their registrations, paying miners directly to include their transaction in a block.

Additionally, the companies found value in diversifying their server activity, although they are not related to Bitcoin directly. Some, who in the past mined networks like Ethereum, today use their graphics cards to offer services to other companies focused on artificial intelligence. Some even bought lots of GPUs to dedicate efforts in that direction. In other words, Bitcoin miners now “mine artificial intelligences.”

These three activities, added to the growing use of renewable energies that generate discounts on electricity consumption in jurisdictions where agreements of this type exist, seem to be buoying many companies.

Business remains complicated. The reward reduction that will occur in April, a possible correction in the price of bitcoin after it reaches the limits of this price cycle are factors for which companies still have to prepare.

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