Block Reward Halvings and the Rational Miner

Apr 14, 2020

Bitcoin’s “halvening” event, which reduces the block reward from 12.5 BTC to 6.25 BTC, is coming closer and is projected to take place in about 28 days on May 12. As one of the most anticipated events for Bitcoin in 2020, the block reward halving will also have a major impact on the economics of mining – and since miners that are selling their coins (to cover capital and operational expenditures) are one of the main sources of supply in the open market, it will most likely also have an impact on Bitcoin’s price. Currently, around $360 million worth of BTC are produced each month, and a significant portion of this needs to be sold to cover miners’ operational expenses.
Bitcoin Cash (BCH, a fork of Bitcoin) and Bitcoin SV (BSV, a fork of Bitcoin Cash) already had their halving events last week, on April 8 and April 10, respectively. As halving the reward strongly decreases the size of the cryptoeconomic pie to be distributed among miners, a logical conclusion is that many miners will switch to a coin with the same mining algorithm (in this case SHA-256) that did not have its halving yet. This can be observed for both BCH and BSV post-halvening, but did not influence their price much – both cryptocurrencies are still highly correlated with overall crypto market movements and have not decoupled from them.

Illustration 1: After their reward halvings, the hash rate of BCH (April 8) and BSV (April 10) significantly dropped, with some of the hash rate migrating to BTC. The hash rates for each chain were normalized to 1 for the end of February.
Source:, Bitcoin Suisse Research.

The impact on the hash rate of Bitcoin was minor, as the hash rate of BCH and BSV combined only make up about 5% of the total SHA-256 hash rate. The price drop by about -50% on “Black Thursday” (March 12) had a much stronger effect and led to a temporary decrease in Bitcoin’s hash rate by about -30%. The hash rate has since largely recovered and sits at about 115 Exahashes per second (or around 86% of its all-time high at 133 EH/s).

A Miner’s Breakeven Price
The large price drop on March 12 also meant that some miners are now operating below their breakeven cost to mine Bitcoin. The main factors involved in calculating the breakeven price are a) type of hardware used, and b) electricity price.
Miners using older hardware, e.g. the Antminer S9 (one of the more common mining rigs), were hit especially hard in comparison to users of newer, more expensive Antminer S17 hardware. The difference between the two mining machines is their chip size: While the S9 uses 16nm chips, the S17 has much smaller chips that are 7nm large. This translates to a hash rate output for the mining rig which is about 300% higher for the S17, while the energy consumption is only increased by about 50%.
The other input to the profitability equation for miners, the electricity price, also varies a lot globally. While some miners have access to electricity at prices below $0.025/kWh, the majority is estimated to have access to energy at rates of $0.04-0.05/kWh.
After the halvening, miners will need to excel in at least one of the two categories – either employ the newest hardware that produces more hash rate per kWh, or have access to some of the cheapest energy worldwide. Miners that do neither of the two will likely become unprofitable, meaning their breakeven cost per BTC will be above market prices, and they will be pushed out of business.

Miner Capitulation While turning mining gear on and off is a frictionless process for hobbyist miners, that is not the case for professional mining businesses. Such setups can have several aspects that delay simply shutting off the mining gear. For example, they rely on low electricity rates that were agreed upon with local energy producers in return for constantly using a certain amount of power. Thus, instead of immediately turning off mining gear, professional miners finance their operation through their Bitcoin treasuries (that were accumulated during profitable periods) to stay in business when Bitcoin trades below their breakeven price.

Thus, lower prices may actually accelerate sell-offs, since the selling pressure from miners – over longer timeframes the main source of selling pressure for Bitcoin – increases, as they need to sell more than usual (and even more than they mine!) to cover operational costs. This continues at most until their Bitcoin treasuries are depleted and the miners are forced to capitulate.

When these miners capitulate, the hash rate drops, and Bitcoin’s mining difficulty adjusts. This will make the remaining miners more profitable, since the daily output of BTC is constant (1’800 BTC now, 900 BTC post-halvening), but then gets distributed to a smaller set of more efficient miners with a lower breakeven Bitcoin price.

With this, the next part of the cycle begins: Newly mined BTC now go to the pockets of highly efficient miners that need to sell less to cover their operational expenses, meaning they can in principle retain more BTC and grow their Bitcoin treasury more quickly, which in turn also reduces the selling pressure in the open market. If price reacts to this diminished selling pressure and increases, this will create a positive feedback loop for miners that survived and enable them to sell even less (while still covering expenses), accelerating the upwards price movement. Such feedback loops may have played a significant role in the price rallies after the previous halvenings in 2012 and 2016.

While miner behavior in the markets is certainly not the only variable that influences price, it is important to understand the mechanics behind it: Low market prices or reward halvings initially increase selling pressure, but then strongly reduce it after miners capitulate. As such, one question remains: How can this miner capitulation be identified?

Spotting Miner Capitulation
As outlined above, the halving will lead to another wave of miners that have to capitulate, especially those that use older hardware or have high electricity cost. Indicators based on the hash rate were popularized in 2019 by various researchers ; one of these indicators is called hash ribbons. Hash ribbons are a simple 1- and 2-month moving average (SMA) of Bitcoin’s hash rate. Historically, buying Bitcoin after the hash rate has started to recover after a miner capitulation (as indicated by the 1-month SMA moving above the 2-month SMA) has yielded great results.

Illustration 2: Hash ribbons indicate miner capitulation (grey circles) as well as recovery (blue and green circles). Previous halvings in 2012 and 2016 are plotted with red bars in the hash ribbon indicator.

As was seen already in the hash rate chart above, the most recent drop from $10.5k down to a bottom below $4k has led to some miners capitulating, which is also indicated by the hash ribbons. This will happen again after the halvening in May. Bitcoin’s ingenious mechanism of difficulty adjustments ensures, however, that the remaining miners will still be profitable. Thus, the hash rate is expected to recover also after the reduction of the block reward – potentially offering an opportunity for investors looking to enter the market.

Bitcoin Suisse