Bitcoin Mining Industry: 2024 Predictions

Author: Colin Harper, Hashrate Index

2023 has undoubtedly been a godsend for Bitcoin miners.

It has provided a necessary second chance for an industry weakened by the sluggish market of 2022, but as 2024 approaches, miners are beginning to face another significant challenge: the fourth halving. The fourth halving of Bitcoin will reduce the block subsidy from 6.25 BTC to 3.125 BTC, meaning miners' earnings will be cut by 50%.

Figure 1: Historical Bitcoin halving events

Like past halvings, the Bitcoin halving in 2024 will undoubtedly leave an indelible mark on the current Bitcoin mining market.

While the third halving (2020-2024) was not a direct trigger, the Bitcoin mining ban implemented by China in 2021 and the subsequent large-scale migration of hash power created conditions for a mining market that is distinctly different from the period of the second halving (2016-2020).

We believe that the fourth halving will bring about even greater changes and may be accompanied by a redistribution of Bitcoin hash power to new geographical regions. For 2024 and the coming years, we (roughly) predict the following scenarios:

More Globalized Bitcoin Hash Power Distribution

North America's dominance in hash power will weaken. During the second halving period, China dominated the Bitcoin network's hash power share, peaking at 70-90% of the total hash power. After China implemented the Bitcoin mining ban, this power balance shifted to North America, where from the summer of 2021 to now, the United States and Canada together have accounted for about 50% of the global hash power share (with some fluctuations).

It is expected that North America's share of global hash power has peaked and will gradually decrease after the halving in April 2024, as miners' profits will be squeezed, leading them to continuously seek cheaper electricity, creating significant growth opportunities in South America, Africa, and other undeveloped regions.

Retail Hosting Services Industry Will Suffer Significant Setbacks

In North America (and elsewhere), the retail hosting services industry will enter a downturn as lower mining profits squeeze both hosts and clients.

In 2023, the average all-inclusive hosting fee in the United States was $0.078/kWh, and in Canada, it was $0.072/kWh; by the fourth quarter of 2023, the average all-inclusive rates were $0.078/kWh and $0.071/kWh, respectively.

Considering the mining economics post-halving, miners with hosting costs at or above average levels are likely to struggle to remain profitable, meaning only those miners with favorable rates will survive in 2024.

2024 Will Foster More Mergers and Acquisitions

In an environment of compressed hash power prices, more mergers, acquisitions, and asset sales will occur in 2024 and 2025.

2022 actually set the stage for this. As hash power prices plummeted and reached historic lows in Q4, one of the largest Bitcoin hosting service providers, Compute North, announced bankruptcy and liquidation, while Argo and other mining companies engaged in asset sales.

In 2023, there weren't many asset purchases and acquisition activities under financial distress, but it witnessed the largest merger in Bitcoin mining history—Hut 8 and US Bitcoin. It is expected that asset acquisition activities in 2024 will reach or exceed the levels of 2022.

Inscription and Other Block Space Utilization Activities Will Continue to Increase Transaction Fee Revenue

Inscription activities and alternative uses of block space in 2024 will bring transaction fee levels to be comparable to or higher than the average levels of 2023.

The biggest dark horse in 2023 was the new technological standards based on non-fungible tokens (NFTs) for Bitcoin—ordinal inscriptions. This new method of creating digital artworks and artifacts on Bitcoin has made transaction fees a significant source of mining revenue.

In fact, the total transaction fees for Bitcoin in 2023 were the second lowest in Bitcoin's history; miners earned $797,867,915 in transaction fees in 2023, second only to the record $1,019,725,113 in 2021. The proportion of transaction fees to block rewards in 2023 was 7.6%, compared to just 1.5% in 2022.

Inscription activities generated $188 million in transaction fees from December 2022 to the end of 2023, with miners earning $129.5 million in the fourth quarter of 2023 (69% of total fees). Additionally, miners' earnings in the fourth quarter of 2023 accounted for 63% of the total transaction fee rewards for the year ($501.8 million).

If Bitcoin continues to rise this year, it is expected that the volume of inscription activities will continue to increase in 2024.

Bitcoin Mining Stocks May Lose Their Price Premium

Historically, investors have treated Bitcoin mining stocks as high beta plays for trading Bitcoin, using them both as substitutes for Bitcoin and as assets that can generate excess returns when Bitcoin rises.

According to the beta chart analysis below, Bitcoin mining stocks have shown correlation trends in bull and bear markets. In bear markets, the volatility of stock prices is more correlated with daily fluctuations in coin prices. In bull markets, due to the strong beta correlation between stocks and Bitcoin, they exhibit strong upward returns relative to Bitcoin. Traders can better capture returns by observing the tighter correlation between daily fluctuations of Bitcoin miners and Bitcoin spot prices. When this trend rises (> 1.15 beta), Bitcoin miners are shifting towards stronger return periods.

Given the recent approvals of various Bitcoin ETFs, it is expected that Bitcoin mining stocks will lose some of their investment premium as substitutes for Bitcoin, as investors can now gain exposure directly through multiple Bitcoin ETFs. Investors may still view them as high beta tools for exposure to Bitcoin prices, but ETFs may reduce their price premium.