Introduction

Bitcoin mining is changing. Due to the recent Halving on May 11 and the increasing financialization of various aspects of the mining industry, we are likely to see significant shifts in the way the market works going forward.

Mining Activity Has Fallen Since the Halving

We’ve argued in previous research how fundamental a variable hashrate is to the safety and longevity of Bitcoin as a whole. The recent Halving helps demonstrate that the market understands the key role that miners play and that miners themselves can drastically impact the demand-supply dynamics of the Bitcoin market — through the amount of mined Bitcoin they sell on the open market and how that changes over time due to Halving events.

What is clear is that post-halving, the total amount of hashrate dedicated to mining on Bitcoin has reduced. This is likely due to certain miners having to reduce their operating costs or completely shutting down due to the reduction in their revenues from mining (Bitcoin’s mining reward fell from 12.5 BTC to 6.25 BTC), as well as technical issues with existing mining equipment such as the Antminer S17. There had been the chances that such miners may be able to survive the halving if Bitcoin’s price appreciated shortly after May 11, but in the absence of such a price appreciation Bitcoin’s hashrate has dropped by nearly 20% since the start of the month. The chart below shows exactly this.

Mining is Becoming Financialized

More interestingly, is that the mining market has become increasingly financialized over the last year — with an influx of various options for investors to buy exposure to mining equipment or hedge their exposure to mining through futures contracts. This new era of mining financialization is likely to make it easier for miners to hedge against future Halvings or protect their bottom line against Bitcoin price volatility, whilst also allowing investors to speculate on changes in the mining market.

The chart below shows a metric that is called the “Hashprice”, it means the estimated amount of Bitcoin one can be expected to earn for a given amount of mining hashrate applied for the SHA256 algorithm used for Bitcoin, Bitcoin Cash, and Bitcoin SV. We look at the metric since the start of the year and we take the data from the mining contract provider Nicehash.

As we can see, a few weeks before the halving we saw a large spike in the Hashprice (as measured by Nicehash), the likely reason for this — given it was not caused by a Bitcoin appreciation — was that mining likely became noticeably less competitive, making it easier for a marginal miner to generate yield. This reduction in competition was likely caused by certain miners exiting the mining industry due to anticipations of Bitcoin’s Halving as well as in reaction to the halvings of Bitcoin Cash and Bitcoin SV.

We can expect the Hashprice to increase in the coming weeks slightly as the Bitcoin protocol adjusts again to the reduction in mining competition (Bitcoin adjusts to mining competition every two weeks through what is called a Difficulty adjustment). It’s essential that any investor or market participant in Bitcoin must pay attention to mining markets, as they act as one of the biggest drivers of selling pressure on the market. The combination of the Halving and the industry’s financialization is likely to be a driver of volatility in hashrate going forward and this fact has wider implications for the market.