Will The Halving Bankrupt Bitcoin Miners?

Will The Halving Bankrupt Bitcoin Miners?

[Music]
on April 19th 2024 the Bitcoin Network
completed its much anticipated having
event which Cuts in half the number of
newly minted Bitcoins awarded to miners
one of the biggest implications is that
all else equal Bitcoin miners have their
revenue effectively cut in half
overnight in a previous video we took a
deep dive into the Bitcoin mining
industry and explained that
substantially all the publicly traded
Bitcoin miners are losing money the
structure of the industry is such that
this is not likely to change given that
the miners were already losing money to
begin with the having should logically
be the final nail in the coffin at least
that’s what many people thought
surprisingly immediately after the
Bitcoin having the Bitcoin mining
industry received a massive windfall
with daily revenue surging to $100
million almost double what had been
previously this is despite the block
rewards being cut in half in this video
we’ll take another look at the Bitcoin
mining industry figure out what causes
unexpected windfall and finally what we
can expect for the industry going
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video to understand what’s going on with
the Bitcoin mining industry we first
need to understand the basics of how
Bitcoin Works let’s say one person wants
to send a Bitcoin to another person
three pieces of information are needed
first the input which is the address of
the person who’s sending the Bitcoin the
second is the output which is the
address of the person who is receiving
the coin finally you need the digital
signature which confirms the sender
actually owns the Bitcoin he or she is
trying to send the digital signature
comes from the transaction by which the
sender originally received the Bitcoin
the data is put into a so-called block
the input and output data are put into
the base block which has a maximum
capacity of 1 MB the digital signature
is put into the larger extended block
which has a maximum capacity of 3
megabytes up until 2017 there was only
the base block by consensus the Bitcoin
miners implemented a soft fork called
segregated witness or segwit segwit
added the extended block which allows
the Bitcoin Network to process more
transactions per block while this
explanation might sound overly technical
the extended block will become very
important later on in the video so how
do the Bitcoin miners fit into this
anybody who wants to have their
transaction verified on the blockchain
needs to place a bid in the so-called me
poool each Bitcoin Trader attaches a bid
with how much transaction fees they’re
willing to pay the transaction fees are
paid in Bitcoin the Bitcoin miners
choose the transaction fees offering the
highest fees until the block is full if
your bid is not chosen you’ll need to
wait until the next block and hope
nobody out bids you people who want
their transactions to be processed
quickly will offer High transaction fees
once the block is full all the miners in
the world compete to solve it solving
the block essentially entails guessing
quadrillions of random numbers until you
match the correct one this is an
oversimplification but the basic idea is
the miners are trying to guess a random
number as quickly as possible once a
minor guesses the right number all the
transactions in the block are verified
the blockchain then proceeds to the next
block the minor that completed the block
received two forms of compensation first
is the block reward the block reward is
made from newly minted Bitcoin and is a
fixed amount for each block additionally
the minor receives all the transaction
fees paid by the Traders whose
transactions were included in that block
usually block rewards make up the vast
majority of minor compensation Marathon
digital is a publicly traded Bitcoin
miner and is one of the few to disclose
its transaction fee Revenue there are
some gaps in the disclosures but
typically transaction fees only
represent a couple percent of their
revenue during times of network
congestion transaction fees can
Skyrocket and make up to around 10% of
Revenue all else equal if more Bitcoin
miners enter the market blocks will be
solved faster if you have 1,000 people
guessing random numbers they’ll almost
certainly guess the correct number
faster than if there were only 10 people
the Bitcoin protocol is set up such that
each block occurs once every 10 minutes
on average if the blocks start being
solved faster than this the Bitcoin
protocol automatically adjusts by making
the random number harder to guess and
vice versa this is called the difficulty
rate as the Bitcoin price has risen over
recent years many new miners have
entered the industry the market for
Bitcoin mining rigs is highly
competitive the manufacturers come out
with more efficient mining rigs on a
near annual basis Bitcoin miners buy
newer more efficient rigs to increase
the computing power they supply to the
network as the difficulty rate increases
older mining rigs become obsolete as
they don’t generate enough Bitcoin to
cover their electricity cost once this
happens they are junked for scrap metal
the estimated useful life of a Bitcoin
mining rig is only 3 to 4 years the need
to periodically upgrade mining rigs is a
massive expense for Bitcoin miners
ultimately all the miners in the world
are competing for a fixed supply of
block rewards as more miners enter the
market each minor receives a smaller
piece of the pie to make matters even
worse for the miners the supply of new
Bitcoins decelerates over time if you
look at a long-term chart of the number
of Bitcoins in circulation it’s a
concave function in the beginning it was
increasing very fast but now it’s
increasing very slowly this is due to
the having events which take place once
every 4 years this cuts the block
rewards in half so all the miners in the
world are competing for slices of an
Ever shrinking pie almost all of the
publicly traded Bitcoin mining companies
are losing money the three largest
Bitcoin miners in the US by market cap
are Marathon digital clean spark and
Riot Platforms in Q4 of 2023 marathon’s
cost was almost $44,000 per Bitcoin
generated this includes the direct cost
of operating the mining rigs corporate
overhead and depreciation remember that
mining rigs need to be replaced every 3
to 4 years so depreciation is a huge
expense the average price of Bitcoin
during the quarter was
$37,000 clean Spark’s total cost per
Bitcoin was slightly lower at around
$40,000 the average price of Bitcoin
during the quarter was $36,500 the
average bitcoin price is different for
marathon and cleans spark because it’s
weighted by when each Bitcoin was mined
as Bitcoin was volatile throughout the
quarter these numbers are slightly
different for each company as of the
time of recording this video the Bitcoin
price is
$644,000 had they held on to their
Bitcoin they’d be in the green by now
but the point is it costs them more to
mine each Bitcoin than the price at the
time while they might get lucky if the
price appreciates going forward the core
might mining operations were
unprofitable Riot platforms has multiple
segments besides Bitcoin mining they
don’t provide enough segment level
disclosures to accurately calculate
their cost of mine each Bitcoin but in
the fourth quarter they had an adjusted
operating margin of
99% this is excluding the gains they
recognize on their Bitcoin Holdings
we’re just looking at the profitability
of their core operations you might be
tempted to say look the Bitcoin price is
$64,000 now if it cost marathon and
cleanspark about $40,000 to m Bitcoin
they should be profitable now right but
you also need to consider that the
difficulty rate is almost always
increasing and increasing very quickly
as the difficulty rate increases the
cost to mine each coin also increases
because any given mining operation will
generate less Bitcoin so you can’t
compare old mining costs to current
prices historically the publicly traded
Bitcoin miners have been able to sustain
their losses and expand their operations
by issuing billions of dollars worth of
new shares over the past four years Riot
clean spark and Marathon digital have
increased their share counts by 9fold
24-fold and 29-fold respectively and now
back to the main topic of the video most
of the Bitcoin mining companies were
already losing money before the having
now that their block rewards are getting
cut in half will this be the final nail
in the coffin remember that Bitcoin
miners generate Bitcoin through two
sources the block reward and the
transaction fees typically the vast
majority more than 90% of their revenue
comes from the Block rewards this chart
shows the aggregate amount of Bitcoin
earned by all miners each day the having
occurred on April 19th on April 20th the
block reward was indeed cut in half but
the transaction fees skyrocketed the
transaction fee skyrocketed to such an
extent that the minor Revenue actually
increased in the day after the having so
what happened it’s all thanks to this
man Casey Rod armor rod Armour is a
Bitcoin Enthusiast who created two new
Bitcoin related Innovations over the
past year and a half you might remember
the nft crates from a few years ago
people would make local quality digital
artwork turn it into an nft and sell
them some people made an obscene amount
of money by selling nfts a much larger
number of people lost an obscene amount
of money when they bought these
worthless pieces of digital art most of
the nfts were created on the ethereum
blockchain ethereum allows for so-called
smart contracts which can be used to
create and transact nfts in early 2023
Rod armor found a way to create nfts on
the Bitcoin blockchain he called them
ordinals remember that each Bitcoin
block is 3 megabytes in total there’s 1
megab base block with the addresses of
the sender and receiver then there’s the
3 mbte extended block for the digital
signature while the digital signature is
required it turns out you can actually
put whatever data you want into it so
long as it’s less than 3 megabytes this
includes jpeg text files and you can
even put short audio files into it in
early 2023 Rod armor published a paper
telling people how to make these
ordinals and people started minting nfts
on the Bitcoin blockchain people would
create ordinals and sell them on the
second market for example these ordinals
with pictures of rock sold for as much
as $26 million to get a sense of just
how dumb this is many banks allow you to
type a short message to the recipient
when you make a wire transfer imagine
that you copied a picture of a frog into
this message and then convince someone
to pay a million dollars for the receipt
that’s basically what the ordinals are
Bitcoin was supposed to be a means of
facilitating transactions but people
found a way to attach jpegs onto it
thereby creating a new grift around May
of 2023 Bitcoin ordinals garnered a lot
of hype among a certain segment of the
crypto Community many people started
creating new ordinals in an attempt to
cash in on the hype typically Bitcoin
transaction fees stand at around $1 or
$2 per transaction increased demand from
ordinals pushed fees up to $30 within a
couple months people realize that these
ordinals are useless gimmick their
prices collapse and there’s no longer
any reason to print them by the summer
trading volume for Bitcoin ordinals
decreased by 97% starting around
November Bitcoin prices were rising in
anticipation of the spot ETF approvals
this caused a general Mania in the
Bitcoin community and people started
printing ordinals again this again drove
a massive spike in transaction fees it’s
important to note that only a very small
percentage of Bitcoin Traders were ever
involved with ordinals but based on how
Bitcoin transactions are processed a
small number of people can have a huge
impact on transaction vs remember that
each block can have 4 megabytes of data
normal Bitcoin transactions have very
little data they’re basically just a a
few lines of digits each because each
transaction is so small up to 2,000
transactions can fit into each block
thus the Bitcoin Network can process
about 2,000 transactions every 10
minutes but when you add a JPEG of a
frog onto a block this can be a lot
bigger just a few ordinals can take up
the entire block this is despite the
fact that the monetary value is quite
small most ordinals are made by
transacting one Satoshi which is the
smallest transactable unit of Bitcoin
one Satoshi is one 100 millionth of a
Bitcoin this is worth a fraction of a
penny so the value of these ordinal
transactions are tiny in monetary terms
but massive in the amount of data they
take up with ordinals taking up so much
of the blocks the network became
congested and fees went through the roof
remember that the number of blocks is
fixed at about one every 10 minutes it
doesn’t matter how many miners are
plugged into the network more miners
entering the industry just means there’s
more competition between the miners it
doesn’t speed up the processes of
Bitcoin
transactions even when the ordinal craze
push up the transaction fees above $30
Traders could still make Bitcoin
transactions on centralized exchanges
like coinbase at a much lower cost so
how is this possible centralized
exchanges like coinbase maintain
internal ledgers when you buy Bitcoin on
coinbase you’re typically buying it from
another coinbase customer coinbase just
updates the ownership of the Bitcoin on
their internal Ledger no transaction is
actually made on the blockchain so
coinbase doesn’t need to pay any
transaction fees to the miners they only
make onchain transactions when they need
to increase or decrease the AG amounts
of Bitcoin they hold this can be done
with a small number of large
transactions the Bitcoin transaction
fees are based on the amount of data in
the transaction instructions the
monetary value of the transaction
doesn’t materially impact the amount of
data in some cases it might only cost $3
to make a$1 billion Bitcoin transaction
but it might cost hundreds or even
thousands of dollars to send a JPEG of a
frog even if the monetary value is less
than 1
cent so now we know that the spiking
transaction fees in May and December of
2023 were related to bitcoin ordinals
but what about this much bigger Spike on
April 20th 2024 transaction fees spiked
to
$128 and coincidentally this happened
just one day after the having event so
what’s going on again it’s all thanks to
this guy Casey Rod Armour after seeing
the success of his ordinals project he
decided to make a new project called
Bitcoin runes his inspiration for the
name was ancient Nordic runes that’s why
he dressed up in a viking Halloween
costume for this podcast appearance big
coin runes are similar in concept to
ordinals but while ordinals contain
non-f fungible digital art runes are
so-called fungible tokens they’re
basically new cryptocurrencies you can
create off of the Bitcoin blockchain Rod
armor created the Rune protocol whereby
people can create new coins with unique
names each name has to be unique so once
someone makes a rune coin with a given
name nobody else can make a coin with
the same name to be clear these Rune
coins are meme coins with zero utility
and that’s not just my opinion that’s
what Casey Rod armor himself says in a
blog post he explained that 99.9% of
fungible tokens are scams and memes but
since crypto Traders will likely buy
into scams and memes anyway there’s no
harm in him creating a new one rod armor
timed the launch of runes to match up
with the Bitcoin having in April 2024
the runes have nothing to do with the
having the timing was purely chosen to
capitalize off the general hype relating
to the having as soon as the Rune
protocol was launched thousands of
people started mining new Rune coins
because each name is unique people
rushed to grab up the most meme worthy
names before anyone else this caused
massive congestion in the Bitcoin
Network and transaction fees went
through the roof so what does this mean
for the miners historically 90 plus% of
their revenue has come from block
rewards but even as the block reward is
cut in half could they make up the
difference with transaction fees in the
long run probably not while they got a
temporary windfall from the runes this
is almost certainly not sustainable
Bitcoin runes have zero real world
utility even according to their own ER
so just like with ordinals the hype will
eventually exhaust itself gimmicks like
ordinals and runes are unlikely to have
a significant impact on transaction fees
in the long run as of the time of
recording this video Bitcoin transaction
fees have already decreased to $28 from
the post having high of
$128 there’s a crypto consulting firm
called Luxor that developed the hash
Price Index this estimates the total
amount of Revenue a Bitcoin miner can
make per hash rate per day hash rate is
a measure of computing power this index
basically Al tells you how much revenue
a Bitcoin miner can generate with a
given amount of computing power deployed
the hash price index depends on the
price of Bitcoin the network difficulty
rate the block reward and the aggregate
transaction fees immediately prior to
the having one petahash of computing
power would generate $1 1005 per day of
Revenue this spiked to $182 when the
Bitcoin Rune coins cause transaction
fees to surge as of the time of
recording this video the runed windfall
has largely subsided the hash price
index has fallen to $60
aggregate minor Revenue has indeed been
cut in half as a result of the having
the rude Mania was only a temporary
reprieve all right guys that wraps it up
for this video what do you think about
the Bitcoin having let us know in the
comment section below as always thank
you so much for watching and we’ll see
you in the next one Wall Street
Millennial signing out

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On April 19th the Bitcoin network conducted a halving event whereby block rewards for Bitcoin miners was cut in half. All else equal Bitcoin miners would have had their revenue cut in half overnight. Yet surprisingly, Bitcoin miners experienced an unexpected surge in revenue post-halving as transaction fees skyrocketed. So what’s going on?

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0:00 – 2:16 Intro
2:17 – 8:45 Bitcoin mining industry
8:46 – 15:37 Transaction fees
15:38 Outlook for miners