Bitcoin's miners are vital to securing its network but block subsidies, their main source of revenue, just dropped by half. This happens every four years--the subsidy will eventually drop to zero. Miners need a sustainable revenue source. Nascent technologies may help, but these have yet to prove themselves.
Chart 1
What's Happening
On April 19, 2024, the fourth Bitcoin halving event reduced the block subsidy paid to miners to 3.125 BTC per block (a new block is added to the chain every 10 minutes; the subsidy for each block is awarded to the first miner to solve a computational puzzle.)
The mining network supports the security of the Bitcoin network: to take control of the network, a malevolent actor would need to control more than 50% of the total computing power of all miners in the network. In exchange for providing this security, miners receive the fees for all transactions included in each block that they mine. They also receive a subsidy from the newly issued BTC, to support their profitability until transaction revenue suffices.
Why It Matters
The subsidy represents the largest part of miners' revenue; halving it meaningfully reduces their profitability. Bitcoin needs new use cases to generate transaction revenue that can replace the diminishing subsidy and keep mining profitable.
What Comes Next
We expect consolidation in the BTC mining industry to accelerate. Miners will need to increase their share of blocks mined to mitigate the reduction in revenue per block. Those that have been more profitable to date, or have accumulated BTC reserves that have increased in value, are best positioned to invest in upgrading or adding to their rigs, expanding into new locations, or acquiring other miners. Some operations, particularly those with higher energy costs, will become unprofitable and shut down.
Miners' credit risk depends on how they optimize their energy costs and manage liquidity to cover fiat-denominated debt and operational costs. We expect miners to continue to explore partnerships with energy grids. Mining can act as a flexible energy demand to help balance the load on the grid, which is especially valuable to renewable energy projects.
Emerging technologies may support revenue growth to replace the diminishing subsidy. They seek to address Bitcoin's limited functionality, relative to other blockchains. For example, Ethereum has steadily grown transaction activity through decentralized finance applications and tokenization (the representation of an asset on a blockchain, enabling it to be used in transactions on that blockchain.) Ethereum is designed to support smart contracts and the creation of on-chain tokens for such applications and has an ecosystem of layer-2 blockchains that boost its scalability. (Layer-2 blockchains are separate blockchains that process multiple transactions as a batch, before settling them as one transaction on Ethereum.)
Bitcoin currently lacks these functionalities, however:
- Two new protocols, Ordinals (launched in January 2023) and Runes (launched in April 2024)--enable the creation of different types of tokens on Bitcoin.
- Layer-2 blockchains for the Bitcoin ecosystem are emerging and may support smart contract functionality as well as boosting scalability.
That said, these technologies have yet to make an impact. Both protocols provoked a brief spike in transaction revenue at launch, driven by speculation. To sustain miners' profitability in the long term, and thus the security of the Bitcoin network, the new functionalities must support the emergence of solid use cases.
This report does not constitute a rating action.
| Primary Credit Analyst: | Andrew O'Neill, CFA, London + 44 20 7176 3578; andrew.oneill@spglobal.com |
| Secondary Contact: | Lapo Guadagnuolo, London + 44 20 7176 3507; lapo.guadagnuolo@spglobal.com |
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