While many eyes are on the price of Bitcoin following the halving event which took place early in the week, there needs to be a close examination of what is happening in the mining sector. This event has a direct impact on the miners, and with it cutting the reward by 50 percent, the profitability takes a major hit.
Profitability is huge for miners and many of them only operate on small margins and thus a cut of 50 percent can often cause capitulation. However, there has not been a drastic capitulation seen thus far and there may be very good reasons why the mining ecosystem is not going to feel the pinch from the reward halving.
Interestingly, there has already been a bit of a dress rehearsal of what happens to the mining space when the profitability is cut drastically. When the markets collapsed in March, there was a big loss in profits for miners, and there was a capitulation that led to a difficulty drop of around 14 percent.
But this could be one reason why there is not much of a capitulation now as the weaker miners have already fallen away. There are also other reasons why the miners may be okay with the cut in profitability such as cheaper electricity in china, and lower demand for power; lower operational costs from struggling currencies and the difficulty adjustment.
China reportedly comprises roughly 65% of all Bitcoin computing power, according to the latest data. And this is significant because China is well known for reasonable electricity costs, as well as its hydroelectric power from Sichuan province.
the increase in the supply of electricity in Sichuan gives large-scale mining centers in the region the ability to negotiate electricity prices. For the next few months, big miners are likely to receive major discounted electricity rates, decreasing operational costs.
More so, the worldwide implementation of stay-at-home measures and strict lockdowns further decrease the level of electricity usage. Major factories and millions of small businesses remained closed for around two months.
Lower costs, weaker currencies
According to Whit Gibbs, CEO at Hashr8, the decline of the ruble’s value may affect mining centers based in Russia.
“This halving COULD be the most brutal in history but it’s all just a best guess. There hasn’t been a comprehensive report in the last week to talk about current geopolitical and economic conditions, and how they’ll impact mining/ the price of bitcoin,” Gibbs said.