The digital assets industry is anticipating the expected first- and second-order effects of the upcoming bitcoin "halving" event expected in April 2024 – when the amount of new bitcoin generated and awarded to bitcoin miners will decrease from approximately 900 to 450 units per day. 

Approximately every four years, bitcoin's algorithm reduces the supply of new bitcoins via what has become known as the bitcoin halving. This translates into a 50 percent reduction of bitcoin mining revenue. Historically, the price of bitcoin increases in the period leading up to the halving event, as evidenced by the 19 percent increase before the 2020 halving and the 142 percent increase before the 2016 halving. Despite this price increase, the halving poses a challenge for miners who must compensate for the reduction in mining rewards while simultaneously keeping costs down. It currently costs roughly $10,000 to $15,000 to mine a bitcoin, and some estimate that these costs will double and may reach as high as $40,000 after the 2024 halving.

Bitcoin miners require substantial capital investment to purchase and maintain mining equipment and the facilities to house them. To remain competitive, miners must also reinvest in the latest, most efficient hardware. Mining firms often take on substantial debt to fund these expensive purchases. Shrinking profit margins can prevent firms from investing in the latest mining technology, which can decrease their mining efficiency and further reduce profitability. Following a significant drop in bitcoin's price in the second half of 2022, there was a wave of bankruptcies among mining firms that had accumulated substantial amounts of debt and prioritized expensive growth.

With each halving event, mining firms must adapt to a lower-margin environment. Cash-strapped firms exit the market or merge with bigger firms. Unlike the previous two halving events in 2016 and 2020, the 2024 halving event may result in a wave of consolidation and defaults. Before the crypto boom in 2021, there were few large-scale miners and fewer publicly traded mining firms. Investors began pouring money into private and publicly listed mining firms during the 2021 crypto bull market. This in turn brought many new entrants into the sector. As the market matured, asset-backed loans – specifically, collateralized equipment financing – became a popular financing option for miners to expand their operations by purchasing more advanced computing equipment.

Holland & Knight Takeaways

• Mining firms are focusing on efficiency and lean operations to remain profitable in the harsher economic landscape post-halving. They are gearing up for the halving event by upgrading to more efficient equipment (i.e., low energy costs) and buying up more mining facilities.
• Smaller firms face increased financial pressure as larger firms buy up smaller operations. Some may be forced to merge with public companies to gain access to liquidity. Unprepared or overleveraged miners struggling to generate enough revenue to cover loan payments may default or face legal action from their lenders.
• Lenders are exposed to bitcoin miner defaults. They may inherit bitcoin mining companies or equipment, which comes with their own set of unique problems. With newer and more efficient machines constantly replacing older models, the rapid devaluation of the financed equipment exposes lenders to significant financial losses. Lenders seeking to operate the mining equipment must find a host facility to plug in the machines. Given the risk of defaults following the April 2024 halving, lenders should consider discussing their options and exploring strategies to monetize foreclosed collateral.