3 Ways Bitcoin Miners Could Make Up for Lost Revenue After the Halving

The next bitcoin (BTC) halving—in which the amount of new bitcoin rewarded to miners with each newly found block is cut in half—is expected to take place next week. However, higher bitcoin prices, technological developments, and slight tweaks to business operations could help take some of that sting away from miner revenue.

Bitcoin Rally May Make Up for Post-Halving Subsidy Drop

Bitcoin miners are rewarded in bitcoin for successfully mining a block. After this halving, that reward will drop to 3.125 bitcoins. Over time, miners build up a reserve of the bitcoins they receive, and oftentimes those are sold ahead of halving events to cover costs of operations and equipment as mining gets more competitive.

This time around, miners have sold fewer bitcoins ahead of the halving—all thanks to the recent bitcoin rally. And if the price of bitcoin rises further, as it often does after the halving, the value of the bitcoin in miner reserves will go up, too. That could go some way toward making up for some revenue lost.

For example, the price of bitcoin was around $9,500 at the time of the prior halving on May 11, 2020, when the per-block subsidy was reduced to 6.25 bitcoins. The price eventually hit a record high at roughly $69,000 in December 2021. That means if a miner wanted to sell their block subsidy at that peak, it could theoretically fetch $431,250, up from $59,375 at the time of halving.

While past price trends may not guarantee future results, but this halving is different because of one factor driving up the demand, and consequently the price for bitcoins—spot bitcoin exchange-traded funds (ETFs).

Since the spot bitcoin ETFs started trading on Jan. 11, they purchased 212,852 bitcoins till the end of March, while miners have produced 74,756 bitcoins over the same period, according to Bloomberg data analyzed by Bitwise Asset Management.

With bitcoin supply limited to 21 million, and more than 19 million already in circulation, successfully mining bitcoin requires sophisticated equipment and significant energy costs. It also means a demand-supply imbalance could push bitcoin prices higher.

Higher Transaction Fees May Cushion Some Revenue Lost

There are two Bitcoin blockchain developments that didn’t exist at the time of the previous halving and that could prop up bitcoin miner revenue via higher transaction fee volume—bitcoin ordinals and Layer 2 networks.

Historically, transaction fees have been a minuscule part of bitcoin miner revenue.

Bitcoin Ordinals

Bitcoin Ordinals are somewhat like non-fungible tokens (NFTs)—unique digital assets, popular in the Ethereum and Solana blockchains. Though unlike NFTs, ordinals are fungible. Also, the data associated with the Ordinal (usually an image) is stored directly on the Bitcoin blockchain. Storing this data on the blockchain could take up a lot of block space, which is costly and also increases transaction fees for those who wish to make payments on the network.

Over the long term, the network will need to generate sufficient transaction fees to take the place of newly created bitcoin as the supply cap draws near. Ordinals may be one way of boosting miner revenue via transaction fees. According to Blockchair, on more than one occasion Ordinals have led to blocks being created with fee revenue greater than the block subsidy itself.

Layer 2 Networks

Layer 2 networks—chains built on top of the Bitcoin network—allow users to transact and gain access to new features off the base Bitcoin blockchain, while ultimately still having those transactions settle on the Bitcoin blockchain.

This allows fees on the base chain to rise sufficiently to incentivize miners to secure the network over the long term, while also keeping fees manageable for end users on Layer 2 networks. It’s effectively a form of transaction batching that increases the economic density of each transaction from the perspective of the Bitcoin blockchain, according to Castle Island Ventures Partner Nic Carter.

In addition to increasing the lump sum of fees that miners collect with each new block, these Layer 2 networks also have the potential to increase bitcoin’s overall value proposition—and therefore its price—by bringing many of the alternative crypto use cases back to the home network of the world’s largest and most liquid crypto asset.

Diversifying Revenue Stream To Keep Mining Viable

Some bitcoin miners, such as Marathon Digital Holdings (MARA), are exploring diversifying their revenue streams to fund the rising cost of mining.

Costs for bitcoin miners are rising as the block subsidy is cut in half, while mining becomes harder as supply diminishes. And cutting back on equipment or operations isn’t an option.

“There are 900 bitcoin today per day awarded. If I don’t have my miners running, somebody else is getting my share of those bitcoin. So you are incentivized to keep your machines running,” Marathon Digital CEO Fred Theil said on a Fidelity Digital Assets webcast recently.

That means higher energy costs. Thiel said his company is not only looking at ways to lower its energy costs via more efficient machinery but also through investing in “energy harvesting.”

This program piloted last year, Thiel said, in theory involves the company getting paid to collect stranded methane gas or biomass, some of which it uses to generate electricity. This electricity then powers its mining operations, which in turn generates a lot of heat. The heat and the gas, industrial components production of things such as ethanol, could then be sold by Marathon to other industrial producers, such as spirits companies, that need them.

Thiel said looking forward to the next halving in 2028, Marathon wanted to drive its mining costs to zero.

“So that we get to a place where mining bitcoin is just really a means to an end versus the end itself,” Thiel said.