The Economics of a Bitcoin Halving:
A Miner’s Perspective

What Is the Halving?

A programmatic change to bitcoin (BTC) issuance is expected to occur this April: the halving. This event happens roughly every four years, or after 210,000 blocks are mined, cutting bitcoin’s issuance per block in half while maintaining the same production cost to support the asset’s long-term scarcity. For readers less familiar with the halving, it may be beneficial to start with our original overview, Understanding the Bitcoin Halving.

This report dives deeper into the economics of the halving from a miner’s perspective, explaining the importance of the block subsidy and how it affects Bitcoin’s “security budget.” It also investigates historical trends in hash rate, miner efficiency, and the difficulty adjustment, which all play crucial roles in Bitcoin’s incentive structure.

Bitcoin Security (Hash Rate) and the Security Budget

Bitcoin uses a consensus mechanism known as proof-of-work, an energy-intensive process that helps secure the decentralized digital network. It is commonly believed that the energy required to mine new blocks also protects the network against bad actors, as attackers would need to outcompete all other miners and forgo the possible rewards if unsuccessful.

Mining’s physical nature means that the process also demands constant capital input as both the machines and electricity required represent a significant cost for mining entities. Given this, Bitcoin was launched with a built-in reward structure for maintaining its constant block production and security. The incentive to mine comes from the “block subsidy,” which supports miners with a reward for their computations (hashes) or energy input. This report views the subsidy as a bootstrapping instrument for maintaining the blockchain’s integrity until user adoption grows to a more significant level.

The current subsidy is 6.25 BTC but has fluctuated between $93,000 and $400,000 per block with a price of $15,000 to $64,000 per BTC. The computing power competing for that reward is approximately 506,385,212 terahashes per second. As of 2024, Bitcoin’s block subsidy has already been halved three times since its launch; however, the hash rate has continued rising. As of the end of 2023, the hash rate has climbed 8000% since the 2016 halving and 394% since the 2020 halving. This includes a 40% hash rate decline in 2021 following China’s ban on Bitcoin mining.

Interestingly, the hash rate has continued its climb, even as BTC crashed from its peak of $67,000 to $15,000 amid its longest bear market.

Hash Rate’s Historical Climb

What Is Hashing?

A “hash” is simply a one-way computer function that enables any data to be viewed uniformly. In other words, a hash allows for any input (no matter the size) to produce a repeatably random, standard-sized output. Bitcoin uses a hash function to create a puzzle for miners and then chains historical blocks together. It is not necessary to understand the full application or specific hashing algorithm, but it is helpful to know that a standard hash is simple for a computer to compute. However, Bitcoin uses a “target” to adjust the difficulty of finding the correct hash.

The correct hash is a hash output that fits a specific parameter set by the network. Miners input transaction data as well as somewhat arbitrary timestamp data and a number only used once, known as a nonce. Since the correct hash lives inside a set of parameters, there is no one right answer. All participating miners mix and match different transaction data as well as nonces to generate trillions of hash output strings per second.

Hash outputs are created randomly, but they are also repeatable. For example, this means that the input string “Fidelity Digital Assets” will always return the same hash, and, because it is a one-way, randomly generated hash, it cannot be reverse engineered.¹ The “hash rate” is simply the rate at which a computer or network can generate these hashes.

What Is the Difficulty Adjustment? 

Bitcoin seeks to maintain an average block time of 10 minutes over a 2016 block period—in human time, this takes approximately two weeks. The network accomplishes this by gradually adjusting the difficulty of finding the correct hash. To understand this process, imagine competing to find a hammer in a haystack. When the number of participants increases, the task becomes easier and demands less time. In order to maintain a competitive element proportional to the number of people searching, the hammer is eventually reduced to the size of a needle.

In place of a hypothetical needle in a haystack, Bitcoin achieves an average block time by implementing a target. The network uses a specific hash output range as the target indicator and can manipulate this range to regulate the probability of finding a correct hash. Miners simply aggregate transaction data together and then hash it all to create a hash output. If the hash output is less than the target, they can write the data into the next block, simultaneously claiming the subsidy for themselves. 

The rest of the network, including non-miners, will download the new block and effortlessly verify the hash themselves. The data validation process is effortless because the other computers can see the hash and the input (block data) and run a single hash function to verify that the hash output is indeed valid. If valid, the network starts looking for the next block. Put simply, the asymmetric nature of hashes is one of the process’s key features. Like a giant jigsaw puzzle, it takes a lot of energy to find the right answer, but anyone can check someone else’s solution quickly and easily.

If more hash rate enters the network, decreasing the time between blocks, then the difficulty adjustment will make the target smaller at the end of the two-week period.² The difficulty adjustment plays a pivotal role in the issuance of bitcoin because it means more demand cannot equal higher issuance. This is the reason why throwing more computing power at the Bitcoin network will not result in more bitcoin being issued at a faster rate. 

Hash Price and Network Incentives

The most crucial metric in the mining industry is the “hash price.” Hash price is best understood as the price the network can pay to incentivize hashes. These hashes will ultimately produce blocks, securing the ledger of transactions. Hash price represents a miner’s expected revenue derived from block rewards (subsidy plus user transaction fees). Miners collectively perform trillions of proof-of-work calculations (hashes) a second. Hash price provides a view into miners’ income based on overall hash rate, which can be used to determine the profitable range of energy expenditure.

For example, a single mining machine may be able to produce 110 terahashes per second (TH/s), or 9,504,000 TH/day. Using on-chain data, a miner could calculate their expected return by multiplying their collective hash rate (TH/s) by the value of the daily hash price per TH/s. Based on this example, a single machine with 110 TH/s can expect to generate $9.51 a day (110 TH/s * $0.086 [the latest daily hash price value]). At a more granular level, the Bitcoin network is currently paying $0.000001001663 per hash.

It is important to note that some liberties are taken within this report to make the concept easier to digest. Block production is like a lottery—all players are not rewarded equally, because “winning” is entirely probabilistic. Therefore, a single machine by itself would not necessarily have a return of $9.51 per day, but it could reach this average with a long enough time horizon. A collective, or pool, of miners is a different story and is viewed as the most efficient course of mining today.

In summary, miners are incentivized by the hash price. The hash price comprises multiple variables, including block reward, user transaction fees, energy input cost (electricity bill), block target difficulty, and mining efficiency. At its most basic level, one can think of hash price as a product of a miner’s daily revenue divided by the hashes (TH/s) produced per day. 

Mining is an extremely competitive industry in which profit margins are constantly driven toward the cost of production. If the cost of production is above the hash price, miners may choose to turn off their machines, driving the difficulty down. If the inverse is true and the cost of production falls below the hash price, the network will incentivize once nonprofitable miners to come back online, driving the difficulty back up while lowering the profit margins once again. The difficulty adjustment is the key component keeping both the network and individual miner’s incentives aligned. 

Halving Effect on the Security Budget

The block subsidy or “security budget” is made up of many variables. The most important variable is arguably the hash rate.

Hash Rate

This report views hash rate, or the total number of guesses per second performed by the entire Bitcoin network, as a function of price. When it comes to price signals, miners are commonly the first to respond. However, many investors may confuse correlation with causation and expect hash rate to precede price as miners sometimes appear to front run the price. This is likely more an indication of decreasing energy costs and improved mining efficiency, which in turn makes the current hash price more profitable. 

Hash rate is affected by the price of bitcoin because, today, miners are not willing to work for free. In the long term, miners could potentially be incentivized outside of the network through methods such as energy curtailment, buyers of first or last resort, and waste energy capture. In a “bitcoinized” future, one can also imagine mining as a proof-of-work defense against overreaching sovereign nations tapping into a country’s respective monetary system. In other words, nation states may eventually choose to run their own mining rigs no matter the infrastructure or energy costs.

Following the past three halving events, the hash rate was immediately impacted. However, the decline in hash rate varied in terms of depth and time until it recovered to previous highs, illustrating that it is not easy to predict exactly how miners will be affected after the upcoming halving. While miners have increased in efficiency over time, the network should still expect to see some number of hash rate become increasingly unprofitable if price remains at pre-halving levels. Therefore, it is fair to expect a decline in hash rate following the halving.

Using a metric called the Puell Multiple, how the average miner stacks up against the historical annual revenue can be determined. The Puell Multiple is calculated by dividing the daily issuance value of bitcoin denominated in USD by the 365-day moving average of daily issuance value. When the halving occurs, it immediately impacts the daily issuance value and thus the Puell Multiple. Using this metric, it can be seen exactly when the halving occurred and when miners may have reached an unprofitable threshold. 

Highlighted in blue are the last two halving events. During these periods, miners quickly moved from a profitable position (when compared to the year prior) to an unprofitable one. Not pictured, but a crucial part of the equation, is the degree of difficulty. If issuance decreased but it was easy to produce blocks, a miner’s profitability would largely go unchanged as they could just increase their production of blocks, producing, for example, two blocks in 10 minutes instead of one block per 10 minutes. Without a difficulty mechanism in place, it would be as though the halving never occurred. This situation is comparable to how the technology industry can lower the price of goods over time but can produce more for less and increase revenue due to efficiency improvements. 

When the degree of difficulty is added to the equation, miners are competing for half the bitcoin they were receiving in the previous four years. A great example of this is the double top of price in late 2021. An extremely profitable peak in the Puell Multiple when price also peaked can be observed, but the later peak in bitcoin’s price (when it reached a new all-time high) had a significantly lower Puell Multiple than the first peak in price. This is because despite a new all-time high in price, the difficulty level was much higher by this time, making it less profitable for miners.

Looking even closer, if one compares just the second and third peak in the Puell Multiple, the second peak is slightly higher than the third despite bitcoin’s price being much lower. In other words, miners were more profitable at a lower price of bitcoin than when bitcoin went on to a new all time-high because, once again, the lower hash rate and difficulty must be considered as these factors made it easier for participants to mine more bitcoin.

The chart below depicts the significant drop of hash rate and difficulty during the 2021 period when the hash rate dropped by 40% and the difficulty fell by a similar amount. In the Bitcoin Difficulty vs. Daily Hash Price chart included earlier in this report, a triple peak can also be seen as difficulty dropped.  

In summary, how each halving affects miners is largely dependent on difficulty and price. Each mining rig has its own profitability price point, and whether the operators can withstand being underwater depends on their financial health. Every operation will be going into this event assuming they have enough reserves on hand to withstand the negative pressure of the halving.

However, if price does not adjust upward for some time, miners will reluctantly shut down and operators may go bankrupt because of debt and bill payments. In this scenario, a healthy exit of participants occurs and the application-specific machines are sold to new participants at a discounted rate.

Price

Although this report is not focused on price, it would be a mistake to not consider it at all. Price has historically lagged as the effects of the issuance decrease. However, as more investment vehicles are approved and the demand for bitcoin increases, the “true” nature of price may be quicker to reflect the issuance change. Increased adoption and market cap may then pave the road for a future in which bitcoin’s price is not as volatile, as it takes more capital to move the market. 

Comparing the price appreciation of each halving, an apparent increase in price roughly one to one-and-a-half-years later can be seen. However, there may be alternative factors affecting price, including the U.S. election cycle, macroeconomic cycles, and liquidity cycles. For a more in-depth overview of price action, readers can access an earlier report, Understanding the Bitcoin Halving. 

Is the Halving’s Impact on Issuance Too Small to Affect Price?

The halving’s impact remains a speculative anomaly, with some investors already beginning to write off the halving as an increasingly insignificant event. This is because the percentage of new bitcoin being issued has become progressively smaller. Each issuance epoch cleverly distributes a corresponding percentage of the supply; for example, the first epoch issued 50 BTC per block, and, subsequently, 50% of the total supply was issued during that time. 

As each subsidy period is halved, so is the percentage of total supply issued. Therefore, many investors may conclude that the halving will have an ever-decreasing effect on the price. In short, the theory suggests that each subsequent halving will come with less volatility and lower returns. 

However, it may not be as straightforward as the numbers suggest. What investors may be incorrectly discounting is the increase in demand and adoption. Current data suggests that less than 5% of the world uses or holds bitcoin.  Compared to the halvings that occurred in 2012, 2016, and 2020, this number is substantially larger. More recently, in 2021, Bitcoin was able to surpass a trillion-dollar market cap valuation even though 95% of the world was not actively contributing to demand.

Fast forward to 2024, and the amount of bitcoin stored on exchanges is at a five-year low, liquid supply is at a 10-year low, and bitcoin exchange-traded products (ETPs) have been approved in the U.S., potentially paving the way for Bitcoin to spread beyond the “techies” and early adopters to the greater financial industry. Looking ahead, bitcoin ETPs in the U.S. may unlock access to a wider range of investors, enabling more access for advisors and their clients.

While the halving could have a decreasing effect on supply distribution, adoption may be simultaneously increasing, potentially holding a stronger influence over price speculation. As new investors begin to dip their toes into the variety of different avenues of exposure, this growing population would be bidding for a scarce asset with a declining issuance schedule.

Is the Decline in Subsidy a Concern? 

Historically, as the supply of new bitcoin issuance is halved, the price per bitcoin grows, offsetting the loss in bitcoin-denominated subsidy with a higher USD-denominated subsidy. 

It is important to note that despite this, a price increase is not guaranteed. Therefore, adoption may continue to be progressively more important, in theory creating higher transaction fees that could eventually replace the diminishing network subsidy. 

Generally, fees have only been present in highly speculative time periods, such as the 2017 and 2021 bull market run. However, the narrative may be changing. The introduction of inscriptions and BRC-20 tokens has brought an influx of speculators and “members” to a once “boring” network. In turn, fees have steadily been rising, arguably outside of a bull market.

Elevated fees may present an opportunity for miners to maintain or even increase revenue outside of the block subsidy. The annual average percentage of miner revenues from fees is around 1% outside of bull markets and has been as high as 7% during bull markets. The average over November and December 2023 is more than double the high of a bull market as inscriptions and other transactions compete for scarce block space. While this short time frame is not indicative of what is to come, it acts as an early demonstration of what could be. 

If fees continue to remain relatively elevated, forming a new floor price for block space, miners will be able to prepare for the upcoming halving more effectively and potentially even avoid losses in the immediate months after.

Are Miners Already Realizing Profits?

The latest data shows that miners are experiencing higher-than-average fees. Many suggest the high-fee environment experienced throughout 2023 was due to a new protocol called ordinals that enabled more speculative trading and minting of new tokens on the once “boring” protocol (Bitcoin). However, spikes in fees are not uncommon, especially when markets are starting to “heat up.”

Below is a depiction of the seven-day moving average fee since 2019. Only until recently, approximately four months before the next halving, have higher-than-“normal” fees been seen. While there was a new BRC-20 mint during this period, fees have not entirely subsided. At the time of writing, the “high priority” fee stands at roughly 45 sat/vB ($3.20) and the “no priority” fee sits at 38 sat/vB ($2.58). In addition, the “purge rate,” or the minimum fee to be accepted by any node on the network, is 23 sat/vB ($1.53). 

This report speculates that inscriptions may be setting a new “floor” price for Bitcoin block space as these new transactions act as buyers of last resort for affordable, empty block space. This means roughly 22 sat/vB ($1.50) may be an acceptable industry standard cost to mint a new inscription. Therefore, if block fees fall to or below this rate, then someone will likely bid for any extra space in that block.

This is important for the mining industry because we know that the normal block subsidy of 6.25 BTC is being reduced by half in a few short months. Therefore, miners will be making assumptions about where variables such as fees, hash price, electricity, and rent may be later in the year. Ultimately, miners must forecast where they think bitcoin’s price is heading over the long- and short-term horizon to make crucial business decisions. Miners holding on to depreciating bitcoin may find themselves facing financial difficulties as their maintenance costs could quickly outweigh their revenues and savings.

Above is a depiction of known miner balances as well as what percentage of the block subsidy they are saving or spending. Miners started selling more than the 6.25 BTC block reward as fees started to spike. At the same time, their total balance (as depicted by the orange line) only dropped approximately 3%. Due to the high fee environment, this presented a pristine opportunity for miners to take additional profits without necessarily impacting their reserves.

Bitcoin miners are inherently bullish. They continue to produce a “commodity” they think will be worth more in the future, otherwise they would not commit time, energy, and money to infrastructure and application-specific integrated circuits (ASICs) whose sole use is to mine bitcoin.  For example, Marathon Digital acquired multiple bitcoin mining sites, while Riot Platforms, another bitcoin mining company, secured 18 exa-hashes (18,000,000 TH/s) of computing power in December 2023.^5,6

The inherent risk in this practice comes when prices are falling. Miners that store value in bitcoin may witness their USD-denominated reserves falling rapidly. Most debts are still paid in USD, so when price is falling, miners may need to choose whether to liquidate quickly and “cash out” what they need in order to provide a long enough runway to avoid the “dip” or wait until price returns to the price point at which they mined the bitcoin. In other words, what started as an arbitrage opportunity may quickly turn into a capitulation event to not only keep their machines on but to also pay other debt.

Conclusion

While bitcoin holders have historically cheered for the halving due to expectations of higher prices, miners must constantly plan for this event to avoid going bankrupt. Not only do miners need to maintain their existing hash rate, energy, and real estate, but they are also continuously competing with the entire network that is trying to do the same thing. 

This means miners cannot afford to just maintain their position in the network. Instead, they must constantly push to acquire more hash rate as well as increase the efficiency of their hash rate, acquire lower-cost energy from cheaper sources, and expand their infrastructure to house any new machines. At the same time, every other player in the industry is also bidding for the same resources.

The months following the halving are the hardest on miners. While the price of bitcoin plays catch-up to the immediate pay cut, miners will need capital reserves to offset the decreased revenue. However, as the protocol evolves, new layers may emerge, bringing with them new use cases and more users. From an aggregate perspective, while the past halvings did see a flush-out of weaker miners, the industry ultimately recovered with more miners and hash rate than ever, demonstrating the resiliency of the network and industry. 

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