The upcoming halving in its ecosystem is now the central focus of bullish narratives surrounding Bitcoin (BTC). Historically, each occurrence pushed the digital asset to new all-time highs. However, what could the next one mean for Bitcoin mining companies? Is it still safe to invest in them?
What is the Halving?
In a nutshell, the halving slashes the reward generated per block mined within the Bitcoin ecosystem by 50%. This is a cyclical event taking place every 210,000 blocks mined or approximately every four years.
The halving is hardcoded within the very design of Bitcoin by the pseudonymous Satoshi Nakamoto to ensure its finite supply. Therefore, this is programmed to happen until such time that all 21 million BTC has been mined.
Such a trait positions Bitcoin similar to gold, which cannot be inflated artificially. But then again, this also makes BTC more appealing than the precious metal because of its known supply cap aside from its accessibility.
The first halving was in 2012, which reduced rewards from the initial 50 BTC to 25 BTC per block mined. The second was in 2016 cutting the booty for miners to 12.5 BTC and the third in 2020 took it to the current level of 6.25 BTC. Now approaching its fourth epoch, the next one will bring it to 3.125 BTC.
Doing the math, the last halving should be around 2140. It’s hard to predict the financial landscape more than a century in the future, but at that moment, miners will most probably have to solely rely on yields from BTC transaction fees.
What Happens to Bitcoin Mining Companies in the Fourth Halving?
Looking at the charts, every halving birthed a new record-high for Bitcoin. The next one will unlikely be an exemption, especially now that there’s already a growing institutional demand for the crypto asset. Applying the basic tenet of the law of supply and demand, the resulting scarcity for BTC is expected to push prices higher.
Considering the high correlation of Bitcoin mining stocks to BTC prices, the future certainly looks bright for them. Taking notes from the data collated by The Motley Fool, major BTC mining stocks have pumped significantly over the following 150 days post-halving.
To illustrate this, Marathon Digital gained 182% from $0.76 to $2.14 after the 2020 halving. At the same time, Riot Platforms jumped 84% from $1.59 to $2.93. These instances can be attributed to what the source called “the Bitcoin proxy effect.”
Furthermore, the reduction in mining rewards should not be a cause of concern. Despite the decrease in BTC gained per block mined, the gradual rise in value of the digital currency should be able to offset those losses.
However, such an assumption comes with a caveat. Smaller Bitcoin mining firms will likely be pruned by the event’s aftermath as they will have to contend with large-scale miners like Marathon and Riot that have better access to high-yield, sustainable, and renewable energy sources. With the tighter competition and lower rewards, it would make more sense for them to just close shop, join up with others, or explore other ventures than risk operating at a loss.
With that, be sure to exercise due diligence in choosing which Bitcoin mining stocks to invest in. Make sure that they have a solid portfolio and are backed by sustainable resources going forward.