Bitcoin's halving poses risks for miners. Who are the potential winners and losers?

By Frances Yue

Hello! Welcome back to Distributed Ledger. This is Frances Yue, crypto and markets reporter at MarketWatch.

Bitcoin (BTCUSD) miners are getting ready for the upcoming halving event, which is estimated to happen on April 19. Historically, halvings have presented risks for bitcoin miners, as the rewards they receive are cut in half.

Halving is a mechanism written in the blockchain's algorithm to control the supply of bitcoin, which has a cap of 21 million. They are scheduled to happen after every 210,000 blocks are mined, or about every four years, until the maximum supply of bitcoin is all released. Following each halving, miners will receive 50% fewer bitcoins for verifying transactions.

At the next halving, bitcoin's block reward is expected to be cut from 6.25 to 3.125 bitcoins.

I caught up with Peter Eberle, president and chief investment officer at crypto investment firm Castle Funds, about who the likely winners and losers of the upcoming halving will be.

Potential winners and losers

"Halving is a challenge to inefficient miners, such as those who have older, slower machines, or machines that are [exceptionally] electricity consuming, or those who are in places where the electricity costs are high," Eberle said in a call.

Larger companies with strong balance sheets tend to be in a better position during halvings, Eberle noted. "They've invested heavily, so they probably have stronger infrastructure than many," he said.

Marathon Digital Holdings Inc. (MARA), one of the largest bitcoin-mining companies in the U.S., said it has been prioritizing agility in preparation of different scenarios after the halving, according to Adam Swick, the company's chief growth officer.

Marathon has been doing extensive forecasts on different scenarios for bitcoin's price and global hash rate after the halving, and making sure it has the most efficient machines, Swick told MarketWatch in a February interview. Hash rate refers to the total computational power being used to mine bitcoin.

It will depend, in part, on bitcoin's price after the halving to determine how miners will fare, Swick said. "If bitcoin's price doubles and global hash rate doubles, the bitcoin miners' economics are still the same," Swick said.

If a miner "was able to run a profitable business when bitcoin was at the price of $15,000, then certainly they can run a profitable business with half as many bitcoins mined at $70,000," according to Eberle.

Bitcoin reached an all-time high at $73,798 last week, though it has since fallen back to around $65,500 on Wednesday, according to CoinDesk data.

Bitcoin vs. Gold ETFs

Assets managed by bitcoin exchange-traded funds have reached a "staggering" $58 billion, as of Monday, since they began trading on Jan. 11, according to Mason Mendez, investment strategy analyst, and John LaForge, head of real asset strategy, at Wells Fargo Investment Institute.

"It took only 57 days for these ETFs to cross $50 billion in AUM - a feat that took spot-based gold ETFs more than five years," the analysts wrote in a Monday note.

To be sure, Grayscale Bitcoin Trust GBTC, the largest spot bitcoin ETF by assets, was already managing more than $28 billion in early January before it was approved to convert to an ETF from a closed-end fund, according to data from YCharts. (GBTC is the only spot bitcoin ETF to have seen net outflows since the Securities and Exchange Commission approved 10 funds for trading in January, with its AUM now standing at $23.7 billion.)

If bitcoin ETFs continue to see inflows at their current rate, their total AUM could soon pass that of spot gold ETFs, according to the Wells Fargo analysts.

Crypto in a snap

Bitcoin has fallen 13.7% over the past seven days, while ether (ETHUSD) has declined 20% during the same period, according to CoinDesk data.

Must-reads

Bitcoin could 'easily' fall under $60,000 if decline continues. Here's why it's under pressure. (MarketWatch)As bitcoin ETFs fuel crypto's rally, here's what financial advisers are telling clients (MarketWatch)Goldman Sachs digital asset head says crypto rally driven by retail investors (Reuters)What Meltdown? Crypto Comes Roaring Back in the Philippines. (The New York Times)

-Frances Yue

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03-20-24 1601ET

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