Digital Asset Digest: Volume 7
Almost three weeks ago, we provided our readers with a pre-halvening market analysis. Now, with the halvening in the rearview mirror, it is time to present our post-halvening findings relating to miner revenue, hash rate, and price swings!
Today’s edition of the Digital Asset Digest will be dedicated to bitcoin’s halvening as we dive into several key metrics including trading volume, mining revenues, and hash rates, amongst other trends.
On May 11th, bitcoin underwent its third halving, paving a new era as its block reward was cut from 12.5 BTC to 6.25 BTC. The event was widely anticipated across the crypto market, and in a time when interest in Bitcoin seemed to be waning by the day, the halvening was a much-needed reminder to investors about its long term potential and the truly disruptive nature of blockchain and decentralization.
Since the BitMEX incident on March 12th, bitcoin has been steadily on the rise. In fact, since the low of $4,107 YTD, bitcoin is up over 135%, dwarfing the returns of the equity market so often reported by the media.
Let’s start with mining. During our pre-halvening newsletter, we pointed out that the total hash rate on the network tends to fall drastically post-halvening as marginally profitable miners are pushed out of the network. The halving this year was no different, as we saw mining activity fall to late-April levels.
Miner Revenue & Hash Rate
Also as expected, miner’s revenue sharply fell post-halvening given the lower block reward. Interestingly, miner’s revenue also took a dive after BitMEX’s DDoS attack on March 12 and only recovered to March levels before plunging again after the halvening. In the chart above, you can see how miner activity dramatically increased in the week prior to the halvening as miners were racing to earn the last few 12.5 BTC blocks before the reward sum was irreversibly halved.
Unlike the hash rate, you’ll notice in the graph below that miners’ revenue tends to recover much more slowly than the hash rate. This is because although the block reward is reduced, the major miners will continue to mine as long as it’s profitable, propping up the hash rate. On the other hand, the number of blocks mined per day is determined by difficulty, which is adjusted every 2,016 blocks. This means that total revenue from mining is also more or less fixed, leaving transaction fees as the main driver of miners revenue.
After the second halving, it took around eight months for the total revenue from miners to return to their pre-halving level. Driving this was a massive rally in BTC, which boosted profitability for miners on the network. We forecast that this halving will be no different. Unless we see a massive surge in BTC as we did in 2018, we expect miner’s revenue not to return to this year’s level until the end of 2020/early 2021.
As we mentioned in our pre-halvening Digital Asset Digest, now that mining only returns 6.5 BTC per block, hobbyist miners can no longer expect to mine profitably. Mining pools and institutional players are now the dominant force in bitcoin mining. Due to the monopolization of the mining sector, we expect concerns surrounding a potential 51% attack to become a much more common narrative in the coming years.
On the trading side, we saw increased volumes across the board as the halvening approached. However, we note that the increase in trading activity was particularly close to the BitMEX DDoS attack in mid-March.
Which brings us to the key question: Was BTC’s rally really caused by the halvening? Or was it a natural recovery from the damage of the BitMEX attack? Based on volume, it would certainly seem like the DDoS attack in March had a much greater impact than the halvening. However, both events occurred suspiciously close to one another, so we are reluctant to definitively attribute the increase in trading volume to either situation until more data becomes available.
While we wait for the market to continue adjusting to a post-halvening environment, we will keep a particular eye on how large mining operations and institutions will adjust their strategies. Since bitcoin’s supply has been irreversibly diminished, this presents a lucrative opportunity for the firms who are not sleeping behind the wheel and are ready to act.