The 2024 Bitcoin Halving and it's Impact on Miners

Executive Summary

Lead Authors: Jerome Ostorero and Pratik Wagh from Coinchange.io 

This research report offers a detailed exploration into the Bitcoin Halving and its impact on the miners.

PART 1

establishes a basic understanding of the Bitcoin mining process, its crucial role in securing the blockchain through complex computational tasks and the rewards that miners receive with new bitcoins and transaction fees. This section also touches on the types of mining equipment, emphasizing the importance of efficiency given the high energy demands and environmental considerations.

PART 2

looks at the implications of the recent 4th halving event of April 2024, which decreased the block reward from 6.25 to 3.125 bitcoins. This reduction poses significant challenges for miners, particularly those with higher operational costs and less efficient equipment, as their profitability will directly diminish. However, historical data suggests that such halving events tend to increase Bitcoin's price, potentially offsetting the reduction in block rewards.

PART 3

details various strategies for miners to adapt to these changes, including the adoption of energy-efficient technologies, new business models that can provide additional revenue streams and the rise of fee-markets on the Bitcoin network. Examples include utilizing stranded energy sources, employing advanced cooling technologies to enhance hardware efficiency, repurposing mining infrastructure for other computationally intensive tasks like AI data processing and earning fees from user activities through Ordinals, Runes, RGB related fees.

About Coinchange:

‍Coinchange is a FinTech firm offering Earn Infrastructure as part of a trustworthy and regulated platform, that empowers crypto exchanges and their customers to earn returns on their stablecoins. With an average annualized 11% APY returns across Institutional and Retail Portfolios, managing a peak of $50 million in assets under management (AUM), Coinchange’s mission is to offer tools that enhance the capabilities of businesses, enabling them to provide added value to their clientele without compromising on established financial principles. We would like to thank the following authors and reviewers for their inputs in making this research report possible. 

Co-authors: Eugene Kitkin of emcd.io and Mati Greenspan of Quantum Expeditions

About EMCD: 

EMCD is an ecosystem powered by one of the world's TOP-7 mining pools. EMCD Mining Pool is the largest Bitcoin pool in Eastern Europe and one of the top-7 pools in the world with over 200 000 users. The company’s been operating and growing for 6 years. The pool offers exclusive Vnish hashrate boosting firmware for Antminer devices and offers special deals for high-hashrate clients. Coinchange also offers a Card-payout solution to businesses and retail who want to off-ramp crypto to gift cards and debit cards. Additionally Coinchange offers a brokerage service for small and large size trades of digital assets. Servers are located in the US, Europe, China, Iran, Kazakhstan, and Russia. In addition to Bitcoin, EMCD offers 6 other popular mining coins. In addition to mining services, EMCD provides users with a wallet with free internal transactions, a built-in P2P platform, and savings tools with up to 14% per annum. Visit them at emcd.io to learn more.

About Quantum Expeditions:

Quantum Expeditions is more than a company; it's a movement. A journey towards a brighter, more sustainable future in cryptocurrency. From Mati Greenspan's recognized thought leadership to Oz Sultan's decades of data center construction expertise, each team member contributes a unique and valuable perspective. They are dedicated to reinforcing the Bitcoin network's security, simultaneously generating revenue by validating and incorporating transactions into the blockchain. The project has undergone a rigorous two- year development phase, culminating in the acquisition of all essential purchase agreements, permits, and lease contracts. They have secured an Energy Service Agreement (ESA) with a local cooperative power company, granting us access to steady and competitively priced energy. Our inaugural facility is poised to produce up to 5 megawatts of power in two operational phases, with the first phase fully funded through our robust crowdfunding initiative.

Co-publishers: Alpha Mining Co. and Wattum Management

Alpha Mining Co.

Alpha Mining Co., is primarily engaged in Bitcoin mining that utilizes Paraguay’s abundant 100% renewable hydroelectric energy. As a Paraguayan company, Alpha Shares is capturing the unique opportunities within this landlocked South American country to add value to the web 3 space.

Wattum Management

Arseniy Grusha is the Founder of Wattum Management, the world’s leading crypto miningequipment distributor and complete mining solutions provider based out of the United States.Under his leadership, Wattum has achieved more than $200 million in revenue and expanded with9 facilities across the United States, Canada, Africa and Kazakhstan, with a global network of over3,000 customers. With over 8 years of hands-on industry experience, Arseniy has overseen thesuccessful start to the growth of DataPrana’s (his other venture) data center operations byensuring a seamless end-to-end experience from real estate and site-sourcing, as well as accessto cost-efficient energy sources, to professional, institutional-grade hosting and managementservices. Through trusted, high-quality services delivered by an experienced and agile team,DataPrana offers clients a competitive growth opportunity, allowing them to expand withouthaving to transfer facilities or disrupt their operations. With a keen focus on building future-proofdata centers for crypto mining and AI applications, DataPrana is committed to deliveringexcellence through state of the art technology.

Special thanks to:

Parker Merritt of Coinmetrics for his numerous articles on the state of the Bitcoin mining industry.

Will Foxley of Blockspace for his excellent podcast The Mining Pod.

PART 1: 

Current Bitcoin Mining Landscape

Understanding Bitcoin Mining

In order to understand Bitcoin Mining, we first need to understand what a blockchain is and there is no better video than Blockchain 101 - A Visual Demo if you haven’t already watched it. Blockchain is a system for recording information in a way that makes it difficult or impossible to change, cheat, or hack. It's like a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant's ledger. I highly recommend you read the Bitcoin White Paper to truly understand the origin story of Bitcoin.

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Mining plays a crucial role in processing transactions and securing the Bitcoin network. Each time a miner successfully adds a block to the blockchain, they validate and confirm all recent Bitcoin transactions included in that block. This not only prevents double-spending but also increases the security of the network by decentralizing the transaction verification process. Miners are incentivized primarily through two forms of rewards: the release of new bitcoins (known as block rewards) and transaction fees. When a block is mined, new bitcoins are created and awarded to the miner along with the transaction fees associated with the transactions packed into the block. As of the writing of this report, the block reward is set at 6.25 bitcoins per block, but this amount is halved approximately every four years in an event known as "Bitcoin halving." The next halving is expected to occur around April 20th 2024 and will reduce the block reward further to about 3.125 bitcoins. We will discuss halving and its impact on miners in Part 2 of this report. But you can guess that the mining hardware needs to be competitive in order to win the block rewards.

Mining Equipment and Profitability

Miners use powerful computers to compete in solving these puzzles, and the first to solve it earns the right to add the new block to the blockchain and receive rewards in the form of new bitcoins and transaction fees. The mining hardware, particularly ASICs (Application-Specific Integrated Circuits), is designed to efficiently solve these puzzles. These machines produce a vast number of guesses at high speeds to increase the chances of solving the puzzle.

According to Koinly, some of the most profitable and best ASIC Bitcoin miners include:

Although getting into the depth of each mining hardware is beyond the scope of this report, we highly recommend reading this blog from Koinly if you are interested. 

One of the common metrics for measuring efficiency is an ASIC’s “joules per terahash” (J/TH) rating. This quantifies the amount of hashrate produced per joule of energy consumed. The higher the J/TH rating, the less efficient the ASIC. Just to give you a context of the progress, Antminer S15 has a rating of 57J/TH while the latest Antminer S21 pro is rated for 15 J/TH (almost ¼ that of S15)! 

If you are interested in learning about the efficiency of different ASICs, ASIC Miner Value has a good list. 

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Image 1: Top 10 ASICs sorted by their efficiency / Source: ASIC Miner Value

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It is critical for the ASICS mining equipment to consume less power especially given the high cost of electricity associated with mining. It not only reduces operational costs but also lessens the environmental impact which has been a huge debate in space. In Part 3 of this report, we will look into mining equipment cooling systems that potentially reduce the operating expenses and create additional revenue streams for the miners.

Geographical Distribution of Miners

Bitcoin mining as a technology is quite portale. It can be placed wherever there is energy. Steve Barbour, the owner of Upstream Data suggests in his interview on The Mining Pod that the miners are moving upstream, meaning they are going right to the source of where power is produced. Just as wind projects move towards wind farms, solar projects move closer to solar farms, Bitcoin miners should lease lands next to power plants setting up mines.

Major Bitcoin mining operations are strategically placed across the globe, largely influenced by factors such as the cost and sustainability of electricity, climate conditions, and local regulations. In recent years, North America has emerged as a dominant player in Bitcoin mining, especially following China's crackdown on the practice. States like Texas have become particularly attractive due to their cheap and abundant renewable energy sources, large amounts of land, and favorable business and regulatory environments. For instance, Texas's unique energy market allows electricity prices to fluctuate based on supply and demand, which can benefit Bitcoin miners who are able to adjust their energy consumption based on price signals​. Texas has been called a bitcoin boom state with nearly 30 crypto mining facilities with major ones such as Riot Platforms and Core Scientific. 

We recently had an insightful conversation with Mati Greenspan, the founder of Quantum Economics. We discussed various aspects of his new venture, Quantum Expedition, and the state of Bitcoin mining. Quantum Expedition is based in Texas, due to its cheap and reliable electricity. According to Mati, Texas experiences extreme weather conditions for only about two months of the year, leaving the rest of the year with a surplus of electricity. Texas also has a unique position with its independent electric grid and a welcoming attitude toward Bitcoin. His company is also a part of the Texas Bitcoin Association, leveraging the state's favorable conditions for their operations.

Iceland hosts significant mining operations like the Genesis Mining Enigma facility, known for using geothermal energy to power its operations. The country's cold climate also helps reduce the need for extensive cooling infrastructure. Geothermal energy in Iceland is also in surplus, they have a similar offsetting/curtailment program as Texas. Africa has seen some interesting development where they set up miners alongside newly constructed power plants that could not have been possible if not for bitcoin miners providing revenue offsetting infrastructure cost. Then there is Finland which has ~89% of its electricity from non-fossil fuel with 35% being nuclear. 

This image below shows the distribution of the mining activity by countries. The United States hosts a leading 37.84% of the total hash power, followed by China at 21.11%. 

Image 2: Bitcoin Mining Map by The Chain Bulletin

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The Bitcoin mining market is brutal. Think of it as a global competition on who can mine the coins in the cheapest way possible yet, you cannot go cheap on hardware and computation capability, or else you lose the computational edge. This brings us to the concept of Mining Pools.

Mining Pools

Not all miners are profitable; some choose to turn off their operations, while others choose to join a ‘pool’. 

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Each participant in a mining pool contributes their mining power, and when the pool successfully mines a block, the reward is distributed among the pool members proportionally to the amount of computational power each contributed. This collaboration helps individual miners to receive a more frequent and stable payout than if they were mining solo, as the rewards are shared across the pool based on each member's contribution. Mining pools are particularly useful in scenarios where the mining difficulty is so high that it could be improbable for a solo miner to discover a block on their own. 

Mining pools use different methods to calculate how much each miner earns. Here’s a breakdown of how some popular methods—PPLNS, FPPS, PPS, and PPS+—work:

1. Pay Per Share (PPS): In the PPS method, miners get paid for each valid share they contribute, regardless of whether the pool actually finds a block or not. This method offers a stable and predictable income because it pays out based on the number of shares submitted rather than the pool's luck in finding blocks. The downside is that miners do not benefit from transaction fees.
2. Full Pay Per Share (FPPS): This method is similar to PPS but more comprehensive. In FPPS, the mining pool also distributes transaction fees on top of the block rewards to the miners. This can lead to a higher overall payout because it includes both the rewards from the block and the fees from processed transactions. 
3. Pay Per Last N Shares (PPLNS): PPLNS rewards miners based on the number of shares they submit during a defined time window that ends with the discovery of a block. Unlike PPS, payments are only made after a block is found. This method encourages loyalty to the pool and can yield higher payouts when the pool has good luck, but it can also result in lower or no earnings during periods of bad luck. 
4. Pay Per Share Plus (PPS+): PPS+ combines elements of both PPS and PPLNS. It pays a fixed amount per share like PPS but also includes a share of the transaction fees calculated using the PPLNS method. 

Joining the right pool not only depends on the revenue share method but also on the % hashrate controlled by these pools, to increase your likelihood of winning a block. It also depends on the customer service offered by the pooling service provider and emcd.io is one of the best in the space ranking them in the top 7 consistently. 

Below is a table from Blockchain.com that shows the market share of the most popular bitcoin mining pools in the last 6 months (Oct 15, 2023 -Apr 15, 2024): 

Image 3: ASIC Bitcoin Miners

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Foundry 28.929% (US based) and Antpool 25.516% (founded in 2013 by China’s Bitmain- the ASICs manufacturer) are the top two mining pools collectively controlling more than 51% of the network. ViaBTC and F2pool are the next largest. The top 5 collectively make up more than 80% of the hashrate dominance. An interesting point to realize here is that there are multiple smaller “proxy” pools that also route their transaction flow through the larger pools, which means these top pools probably control more than what the table suggests. Another speculation is that since AntPool came out of Bitmain, they have early access to the latest mining equipment or they could also be using the latest equipment while it sits in the inventory to be sold. But this is speculation and should be taken with a grain of salt. If you want facts, one of the best analyses on this topic is from Parker Merritt of Coinmetrics in his numerous articles on the state of the mining industry. 

If a single mining pool were to control more than half of the total hashrate, it could lead to a 51% attack on the network. Although such an attack would be detrimental to their own business, you can read about the various attacks that can be theoretically carried out in Investopedia’s 51% Attack: Definition, Who Is At Risk, Example, and Cost. Meanwhile some mining pools are already censoring certain types of transactions. In Nov 2023, F2Pool admitted to filtering transactions coming from Bitcoin addresses flagged by the Office of Foreign Assets Control (OFAC), although they claim to have ‘disabled the tx filtering patch for now, until the community reaches a more comprehensive consensus on this topic’.

The mining space is about to get a lot more competitive with the 4th Halving, so let’s take a look at what halving is and how it will impact the miners. 

Part 2: The 4th Halving and Its Impact on Miners

Miners can make money by either competing to earn the newly released Bitcoins, which is the mining process, or they can earn from the user fees, which are paid in order to prioritize getting their transactions into the next block. In this section of the report, let’s look at Halving and its impact on the Miners. 

What is Halving?

Every 210,000 blocks, approximately 4 years, the number of new bitcoins issued per block gets cut in half. As of the writing of this report, the Bitcoin network is about to undergo its 4th halving event on April 20th 2024. That completes 840,000 total blocks of transactions on the blockchain. Each block is capable of holding a few thousand transactions, and the exact number depends on the complexity of the transactions. This will cause the Bitcoin network’s annual supply inflation rate to decrease from 1.7% to 0.85%. In other words, the number of new bitcoins generated per day will decrease from around 900 to about 450 or from 6.25 to 3.125 bitcoins per block. And a reduced number of new bitcoins means reduced mining rewards.

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This table below shows the progressive reduction in the Bitcoin block reward after every 210,000 blocks mined, which occurs approximately every four years. This process is expected to continue until around the year 2140, when all 21 million Bitcoins are expected to be mined.

Halving cycles and its impact on the price of Bitcoin

Image 4: Bitcoin Liquid Index / Source: coincodex

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Historically, halving events have had a significant impact on Bitcoin's price. The reduction in supply, coupled with sustained or increased demand, has generally led to price increases. For example, after the first halving in 2012, Bitcoin's price rose dramatically from about $12 to over $200 within a year. After the second halving in 2016 the price went up from $640 to nearly $20,000 by the end of 2017. After the third halving in May 2020, the price went up from $8,605 to nearly $68,000 by the end of 2021. History doesn’t repeat but it could rhyme. There are some reasonable price predictions for 1 year post the 4th halving cycle that project Bitcoin to climb to ~$250,000. The concept here is that demand goes up over time while the newly issued supply programmatically goes down. And with the launch of Bitcoin Spot ETFs around the world, the probability of demand going up over time is very high. At the same time, supply is very tight as ~19.7M of the capped 21M supply have already been mined. 

Impact of Halving on the Miners

To understand the effect of Halving on the miners, we need to understand two new terms: Hashprice and Hashvalue. Hashprice, a term coined by Luxor, refers to the expected value of 1 TH/s of hashing power per day. The metric quantifies how much a miner can expect to earn from a specific quantity of hashrate. In other words, hashprice is the daily USD revenue per TH/s. See the chart below by Luxor, shows that the current Hashprice is around $0.10 per terahash/second per day. As the price of Bitcoin goes up the hasprice goes up. 

Image 5: Bitcoin Hashprice Index / Source: Luxor Bitcoin Hashprice Index

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The same chart, if we denominate in Bitcoin, looks like this: 

Image 6: Source: Luxor Bitcoin Hashprice Index

As you can see, the hashprice is BTC terms (some call it Hashvalue) is the daily BTC revenue per TH/s which is currently 159 satoshis per terahash/second per day. And since more miners compete for the same fixed rewards over time, the hashvalue goes down. So the balance between hashprice going up and hashvalue going down determines the profitability of the miners. Remember they have bills to pay in fiat and so hashvalue going down is not necesarrily a bad thing as long as the BTC price goes up. Halving will reduce the hashvalue (as the number of bitcoin rewards will be cut in half) but if the demand for BTC goes up then the price of BTC will go up, causing hashprice to go up and miners can stay profitable.  

Here is a chart comparing the two since inception:

Image 7: The 4th Bitcoin Halving Explained by visualcapitalist 

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The caveat is how efficient the mining hardware is. Because the halving reduces the rewards, which forces the miners to upgrade their hardware (sometimes even before they break even on their previous purchases) just to stay computationally competitive. Many smaller miners are expected to suffer extreme financial pressures to continue operating after the halving. Proof of Work is not cheap!

However, the current data looks strong. According to a report by Parker Merritt from Coinmetrics, “Despite the long-term drawdown in earnings per hash, aggregate miner revenue (USD) has skyrocketed in 2024, hitting an all-time-high of $76.71M on March 11. Transaction fees aren’t nearly at the level they reached in the late stages of 2023’s Ordinals mania, but they remain relatively elevated in Q1, averaging $2-3M per day.” Transaction fees currently account for a smaller portion of the total miner revenue. But they are growing in significance with each halving (more on the Bitcoin fee markets in Part 3 of this report). 

In our conversations with Mati from Quantum Expeditions, he explained that Mining Bitcoin requires substantial capital investment to start and maintain profitability. Stable electricity rates and output are crucial, as is a reliable internet connection and proper environmental controls, like airflow. During raising money for his mining operations, choosing equity over debt made more sense for them due to the high debt burden that most miners face, which could reach up to 70% of revenue. Additionally, equity funding provides investors with a share in the company's future growth, with Quantum Expedition currently valued at $33 million, while publicly listed miners are valued in the billions.

EMCD.io, one of our co-authors operating a mining pool, does use a debt financing model through their yield earning program called Coinhold. Depositors earn around 14% APY and their revenue model revolves around financing liquidity for their own enterprise, EMCD. This strategic approach is how they deliver the promised returns to their stakeholders.

If expenses and debts are not properly managed by the miners, it can even lead to bankruptcy as in the case of Core Scientific. You can read the details of what happened in their case and how miners can use yield to offset debt repayment, in our blog here. But here’s the tl;dr,

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However, after their restructuring in January 2024, they have not only resumed operations but are aggressively expanding. Among the new investors, Bitmain, a leading Bitcoin mining hardware manufacturer, acquired a 5.5% stake in Core Scientific. This stake was part of an equipment sales transaction approved during the bankruptcy proceedings​. So no surprise that they are going to deploy approximately 12,000 Bitmain S21 bitcoin miners before mid-year 2024 and on April 16th 2024, they announced the start of a project to complete a 72-megawatt expansion of the Company’s Denton, Texas data center. Core Scientific CEO Adam Sullivan bought a lot of his company stock in March 2024. Does that signal something? 

Bottom line is, after this halving, it is getting clearer that miners need to get innovative at managing their balance sheets, look for additional revenue streams using their existing hardware, and/or the Bitcoin network needs to come up with applications and use cases that create fee-markets for miners to continue thriving. That brings us to Part 3 of this report. 

PART 3: 

Solutions for Miners post-halving: Reducing OPEX, Generating New Revenue Streams, and Thriving Fee-Markets on Bitcoin Network 

Reducing Miner OPEX

One of the most obvious ways for miners to stay profitable is to reduce their operating costs. They can achieve this by using stranded energy sources (energy that is available, but remains unused or under-utilized due to geographic isolation or inefficient energy grids). Energy sources often overproduce during low energy demands, which results in excess energy that is wasted. Stranded natural gas in oil rigs is an example of this, where these escaping gasses are often simply burned (flared). If you drive past a refinery, you have seen flare gas as shown in the image below: 

Steve Barbour from Upstream Data argues that when a miner signs a contract with a gas company to use the waste flare gas, it almost always ends up being a one-sided deal. The miner bears the stress of a downturn in the Bitcoin cycle, whereas the gas company continues earning from something they wouldn't have earned from anyway. Solution: the oil company buys the generator and operates it. They take care of it because they have skin in the game. The mining company uses the generator to mine and pays based on the power supplied. In some cases, the energy companies themselves end up mining. Alternatively, instead of doing a cash deal for the flare, offering them equity can also help the flare gas company bear responsibility for load fluctuations that affect the miner's performance.

Another source of stranded energy is remote locations where there is plenty of wind and solar energy but is inaccessible to the grid. Then there is geothermal energy which is difficult to fully utilize, or the biomass/biofuel which can be harnessed from the waste produced by plants, animals, and humans but the infrastructure to transport this energy is lacking. Africa is a continent that has huge potential to harness stranded energy. In an article What is Stranded Energy? Why it Matters to Bitcoin, published by Coinmonks, they make a very good case for why despite Africa being believed to hold approximately 125,000 MW of stranded energy, it is not being harnessed. But guess what, since Bitcoin miners don’t need to be physically located in any specific area, they can go right to these sources and monetize stranded energy. Companies such as Upstream Data and EZ Blockchain create  mobile Bitcoin mining units making it easier to transport and relocate to the stranded energy sources. 

Harmattan Energy (formerly known as Soluna Technologies) specializes in developing green data centers that utilize excess renewable energy that would otherwise go to waste, for high-intensity computing tasks like Bitcoin mining, artificial intelligence, and machine learning. 

Crusoe Energy Systems, founded in 2018 and based in Denver, focuses on converting wasted natural gas from oil fields into electricity to power mobile data centers directly at the source. They call it the Digital Flare Mitigation® Technology which captures the flare gas and uses it to fuel high-performance computing tasks like Bitcoin mining, AI model training, and other data-intensive processes. Crusoe has successfully monetized over 1 million cubic meters of stranded natural gas across U.S. states, generating over $2 million in bitcoin and expanding recently to Argentina. 

It is important to note that Bitcoin mining itself generates tremendous amounts of heat, which itself can be tagged as stranded energy. CleanSpark (which flipped Riot Platforms in March 2024, to become the second largest public miner by market cap) is actively employing immersion cooling technology to enhance the efficiency and sustainability of its Bitcoin mining operations. Their 20 MW project in Norcross, Georgia, utilizes this technology by fully immersing approximately 5,940 Antminer S19j Pro mining machines in a biodegradable liquid. This method not only increases the mining hashrate but also reduces power consumption and extends the life of the mining equipment. The cooling liquid used is a non-conductive synthetic hydrocarbon, which is safe and environmentally friendly.

Riot Platforms participates in ERCOT's "demand response" program, which is a part of the Electric Reliability Council of Texas's initiative to maintain grid stability by managing electricity demand. In this program, companies like Riot receive financial incentives to reduce their power usage during peak demand times, which can help prevent blackouts and ensure grid reliability. This is particularly valuable during extreme weather conditions, such as the intense heat waves Texas often experiences. Riot earns significant revenue through this program by opting to shut down its operations temporarily and sell unused electricity back to the grid. In June 2023 alone, Riot earned about $1.6 million through this scheme and in August 2023, Texas paid Riot $31.7 million to shut down during the heatwave. Riot voluntarily curtailed its energy consumption to take advantage of credits available by limiting use. The revenue Riot generated from demand response credits significantly exceeded the value of the Bitcoin it mined during that period. The total value of these credits ($31.7 million) surpassed the earnings from mining 333 Bitcoin, which amounted to approximately $8.9 million at the end of August. 

Alpha Mining Co., one of our co-authors for this report, is primarily engaged in Bitcoin mining that utilizes Paraguay’s abundant 100% renewable hydroelectric energy. As a Paraguayan company, Alpha Shares is capturing the unique opportunities within this landlocked South American country to add value to the web 3 space. Paraguay boasts vast river systems that sustain some of the world’s largest hydroelectric plants, making electricity the country’s top export and largest contributor to its GDP, and providing cost-effective power solutions. Their current industrial agreements grant them access to up to 2 Megawatts of power at a competitive rate of $0.03 per kilowatt hour. 

There are many other projects that are worth looking into but beyond the scope of this report such as OceanBit deriving energy from ocean temperature differences, Reformed Energy using plasma gasification technology to transform solid waste into synthetic gas, Stronghold converting piles of waste coal back to land with bitcoin, and TeraWulf using nuclear power to mine bitcoin. 

New Revenue Streams for Miners

Repurposing Bitcoin Data Centers for AI Cloud Compute

Other ways to generate additional revenues for miners can include repurposing the mining facility to also act as an AI data center that would host cloud compute power for the new and hot industry of AI. Bitdeer (NASDAQ: BTDR) announced successful completion of NVIDIA DGX SuperPOD H100 System which is a High-Performance Computing Data Center for Bitdeer's AI Cloud division. They have been providing bitcoin mining solutions and as of February 29, 2024, they have 6 mining data centers around the world, with a total hash rate of 22 EH/s under management. EMCD.io is also in talks to provide AI compute services using their existing expertise. 

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Offering Your Own Transaction Submission Service for Extra $$$

Other ideas for additional revenue generation include miners or mining pools offering their own special services for extra fees. For example, Marathon Digital Holdings (the largest public miner by market cap) introduced a couple of new services in Feb 2024, aimed at diversifying their revenue streams. First, they launched "Slipstream," a white-glove transaction submission service. This service enables users to directly submit their large or non-standard Bitcoin transactions for processing, leveraging Marathon's proprietary mining pool, MARA Pool and allows Marathon to earn extra fees. This makes them the first publicly traded Bitcoin miner to offer such a direct transaction service. It also gave them the status of mining 3 largest Bitcoin blocks ever! Usually a standard transaction size is smaller and one block holds around 3000 of them, these 3 largest blocks by MARA Pool combined only included just 17 transactions due to their ‘non-standard’ size. Some of these transactions were related to the Runestone NFT project and an entire rap (audio inscription) song by French Montana. You can listen to the entire 2 minute rap here www.ord.io/64333690.  

EMCD.io is discussing partnerships with layer-2 solutions on bitcoin to offer direct transaction submission for a reduced fee. This will benefit the layer-2 users in terms of reduced fees and guaranteed block inclusion, and it will benefit emcd.io from a consistent stream of transactions directed through them.  

This raises several key questions. Which transactions get picked up? How much blockspace can they occupy? Do miners receive all of the profits from the off-chain transaction submissions? How do we strike a balance between the standard transactions vs their white-glove transactions in terms of democratizing access to blockspace vs maximizing profits?

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Launching A Bitcoin Layer-2 Network

Alongside Slipstream, Marathon also unveiled "Anduro," a suite of merged-mined Bitcoin sidechains. Anduro is designed as a multi-chain layer-two network on the Bitcoin platform that supports the creation of various sidechains. Anduro allows for merge-mining, meaning participating miners can earn from transactions on these sidechains while continuing their Bitcoin mining operations​. The first two side chains developed are Coordinate, which is focused on the Ordinals community, and Alys, which is compatible with Ethereum for institutional asset tokenization (BlackRock, are you reading this?).  

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Hedge Halving Risk With Hashrate Futures

Luxor Technology, in partnership with Bitnomial, has launched the United States' first exchange-traded hashrate futures. This product is a type of futures contract, which is a way to buy or sell something at a future date at a price agreed upon today. What makes this product special is that it's related to bitcoin mining and is aimed at helping miners manage the risks that come with changes in mining power and bitcoin's value. In part 2 of this report we saw that the power used by miners to mine bitcoin is called "hashrate." and with every halving, the competition for hashrate becomes less profitable and adds to the earnings uncertainty.

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These hashrate futures are cash-settled (makes the regulators comfortable) based on "hashprice," which measures the income miners make from a certain amount of hashrate over time. Each contract is set at one petahash (PH) with monthly durations and will be settled against Luxor’s Bitcoin Hashprice Index, providing a means to hedge against the volatility of the hashrate. 

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These futures are traded on regulated exchanges, reducing the counterparty risks that are often present in over-the-counter (OTC) settings, where deals are made privately between two parties without the same oversight. There is also a ‘forward’ product offered by Luxor where a miner can sell their forward production and get bitcoin now. Let’s say a miner has 5 petahash and they would mine x amount of bitcoins in the next 6 months, the forward contract would give them approximately that many bitcoins minus some fees, and that would work better than other ways of financing in the short term. Miners can then buy more ASICs, pay for energy costs or other short term debts. 

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In future they plan to launch more products including Futures related to transaction fees. So if a miner wants to capture a big spike in transaction fee and lock in the revenue, the tool would allow them to do that. Or if the miner has a viewpoint on an Ordinal project like Runes for example, and they want to long the transaction fees going into the project launch, they can get exposure to that. If you want a deeper understanding of how these products work for miners, I highly recommend listening to Will Foxley’s interview with Matt Williams of Luxor Tech.

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Byproduct Heat used for other purposes

What if the byproduct heat generated by some smaller-scale miners that are closer to residential or commercial facilities, could be used for practical purposes, such as heating homes or even swimming pools? Could it be used in environments like greenhouses that require heat to facilitate the growth of fruits and vegetables? There are several miners experimenting with these business models to generate new revenue streams. The heat generated by miners can be used for heating event venues by integrating them into the HVAC system of the venue. Convention centers, resorts, hotels can take advantage of Bitcoin miners to supplement or even replace their existing heating systems. 

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Heat Generated By Bitcoin Mining Used For Growing Vegetables

A couple of renowned Swedish institutes and a Genesis Digital Assets mining company joined forces to bring mining and farming together. While the mining equipment is using up energy to mine bitcoin generating tremendous amounts of heat, the heat can be used to grow food on a large, industrial scale using Greenhouse technology in a sub-arctic climate. Besides that, the heat can also be used for farming fish, insects, and algae as well as to dry biomass or fruits and vegetables. This technology can maintain 25°C even when the outside temperatures are -30°C! 

To summarize, here are some options for miners post-halving to stay competitive:

1. Systems based on latest ASIC chip technologies for maximizing energy efficiency eg. better cooling systems
2. Tap into renewable energy sources and utilize stranded energy
3. Plays a key role in stabilizing energy grids by balancing supply and demand with variable large loads.
4. Add additional revenue streams

Apart from what miners can do to keep themselves competitive, let’s get to the final section of the report on how the community can launch new products on the Bitcoin blockchain resulting in sustainable and healthy fee-markets that create revenue for miners. 

Thriving Fee-Markets on Bitcoin Network

The base layer of the Bitcoin network is a robust, secure ledger that is very well decentralized and highly immutable. But on the flipside, this makes it slower and less scalable than its less decentralized and less secure competitors such as Ethereum and Alt Layer-1s. One way to make bitcoin scalable is to build layer-2 chains on top of the base layer. These layers could be smart contract compatible, and turing complete, enabling a bunch of new use cases. 

Stablecoins/Tokens on top of bitcoin

We have seen the adoption and what many call the “killer app” of crypto, the stablecoins on Ethereum blockchain. But there are several smart people working on issuing Stablecoins on the Bitcoin blockchain. Although the main bitcoin chain is too slow (7-10 minutes per transaction), there are multiple layer-2 solutions being built, which can enable issuance of stablecoins and other tokens. Some of the projects in this space include L-USDt (Liquid-based Tether) and USDA (decentralized, soft-pegged, backed by STX token from a Stacks chain). 

David Marcus (responsible for Facebook’s Diem and Paypal’s PYUSD) is building a payments network on top of lightning network through his venture Lightspark. Coinbase recently partnered with them to offer Lightning Network to its users. 

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Ordinals

Ordinals are a relatively new addition to the Bitcoin blockchain that allow for the creation of NFT-like assets directly on its network. These assets, known as ordinal inscriptions, involve assigning unique serial numbers to individual satoshis (the smallest unit of Bitcoin), and then inscribing them with data like images, text, or videos. This is made possible by the Bitcoin network's Taproot upgrade, which provides enhanced capability for storing arbitrary data within transactions​

While Ethereum-based NFTs often link to external metadata and content stored off the blockchain, ordinals store all content directly on-chain. This has implications for the size and scalability of the Bitcoin blockchain, as all inscribed data adds to its overall size​. Critics argue that it strays from Bitcoin's original purpose as a streamlined digital currency, while proponents see it as a valuable evolution that brings new functionalities to Bitcoin. I would assume the miners to be in the proponents camp since they were the beneficiaries of the fee spikes due to increased activity on the blockchain. 

The BRC-20 token standard is another recent development on the Bitcoin blockchain, introduced by a pseudonymous blockchain analyst named Domo in March 2023. This standard utilizes the ordinals inscription mechanism to create and manage fungible tokens on the Bitcoin network, similar to how ERC-20 operates on Ethereum. Casey Rodarmor, who popularized Ordinals Theory and the proliferation of Inscriptions (NFTs on the Bitcoin network), is planning to release a new protocol called Runes around the time of the halving. Runes is intended to be a more efficient version of BRC-20 token standard, because it results in less network bloat.

It’s likely that the initial burst of usage of this new protocol will result in a period of network congestion and higher transaction fees. If that occurs, it would be temporarily beneficial for miners due to them receiving higher fees (thereby potentially mitigating the impact of the halving event), but temporarily harmful for users because they would be the ones paying higher fees amid the network congestion. Similar to what we saw in December 2023, due to the spike in on-chain activity due to the Ordinals activity and the BRC-20 transactions taking over the mempool. 

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RGB

RGB is a protocol built on the Bitcoin and Lightning Network ecosystems, designed to introduce scalable and private smart contracts, tokens, and other Web3-style features without compromising the base layer's simplicity and security. It uses a client-side validation (CSV) model to manage and validate transactions off-chain, thus enhancing privacy and reducing on-chain bloat, which could otherwise slow down the network and increase transaction fees. RGB enables functionalities like token issuance (including stablecoins and NFTs), decentralized finance applications, and even decentralized autonomous organizations (DAOs). The system also incorporates advanced privacy features, using zero-knowledge proofs to protect transaction details​. 

There are many other solutions being built on the Bitcoin network that can bring thriving fee-markets for the miners. Sidechains including Liquid, Stacks, Rootstock, State channels like the Lightning Network, Non-upgradeable scaling solutions such as RGB and Bitcoin Script that do not modify Bitcoin’s code, Upgradeable scaling solutions like Drivechain (BIP300/301) that require strong miner support and achieve scalability through hard forks. Nostr, a protocol that went viral in late 2022, contributed to the widespread adoption of the Lightning Network. All of these could result in a sustainable fee-market for miners.

If none of this works, there are some who suggest extreme scenarios such as the transition of the Bitcoin network from the energy intensive Proof of Work approach to a more energy-efficient Proof of Stake approach (the one that Ethereum chose). 

For now, the network is thriving, the miners are finding various ways to stay profitable. The world's most decentralized, immutable ledger continues block after block issuing the most secure monetary asset in the history of humans, the Bitcoin.

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Should you enter bitcoin mining now? 

Here is what Steve Barbour from Upstream Data suggests: ‘Ask yourself why? It isn’t a get-rich-quick scheme. And most miners might even tell you it is a get-poor-slow industry. Maybe if you are interested in getting hands on some non-KYCed bitcoins, then you might be able to justify the extra efforts and cost. But it makes the most sense for power generating companies to joint venture with mining companies to earn bitcoin and also solve the liability of garbage gas. One should not get into the bitcoin mining business because they want to. But you might get into the business because you have a problem like excess flare gas, or you have access to ultra cheap energy, or you want to make energy systems more efficient.’

We can’t predict the future, but we can all participate in shaping it in a decentralized way. We spoke with Eugene from emcd.io and he mentioned that there are several Bitcoin Improvement Proposals (BIPs) that are being discussed in this github repo by the miners and node operators in order to adjust the future of the network to keep it sustainable. Some of them could lead to hard forks of the chain if more than 51% of the hashrate is in favor of those BIPs. If you wish to get on the mailing list for these discussions, join the Bitcoin Dev group here.

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