In our report published last month we estimated the breakeven cost to mine one bitcoin at current levels and the projected costs to mine one bitcoin after the 2020 halving. In our report, we estimated breakevens per bitcoin for a commercial mining operator of $6,851 (these have risen to around $7,300 at time of publication) for existing mining devices and estimated breakevens between $12,000-$15,100 per bitcoin after the 2020 halving. In this report, we use similar assumptions to estimate miners’ costs during the previous two halvings in 2016 and 2012 for a comparison to the upcoming 2020 halving.

Background on Bitcoin network halvings

Bitcoin is a decentralized digital currency that enables a near instantaneous transfer of value to anyone in any location with no centralized entities acting as middlemen. The network is secured by miners who receive transaction fees and newly created bitcoins for their work in the network’s proof-of-work ecosystem.

Every four years the network undergoes a reduction in new supply . There have been two halvings, with the third halving set to occur at block height 630,000 or approximately mid May 2020. The first halving occurred on November 28, 2012 and the second halving occurred on July 9, 2016 when issuance was reduced from 50 to 25 and 25 to 12.5 bitcoin per block for the respective event.

Estimated miner costs leading up to and following the 2012 halving

Given that we are a few months away from bitcoin’s third halving in May 2020, we estimate miner costs in the months prior to and immediately following the 2012 halving as a comparison.

Leading up to the halving on November 28, 2012, the bitcoin network hash rate reached a high of ~27 TH/s. The network hash rate is closely related to miners’ profit margins. The hash rate increases as the number of resources, in aggregate, committed to securing the network through mining activities rises. As resources dedicated to mining rise over time, efficiency gains and/or mining costs rise. As such, in order to maintain healthy profit margins for miners, a rising hash rate is typically needed to correspond with a rising bitcoin price.

During the period preceding the 2012 halving, mining operators, on average, were not employing advanced dedicated mining devices as they do today. Instead, a large portion of miners were still receiving bitcoin rewards via FPGA mining. Using the outlined specifications for typical FPGA miners and the assumptions below, we estimate breakeven costs to mine one bitcoin both before and after the 2012 halving. (For more details on early bitcoin mining devices, read our prior reports on bitcoin mining published in 2013).

Breakeven costs before the 2012 halving

First, we estimate the breakeven cost to mine one bitcoin three months prior to the halving. This allows us to use a similar time frame between today’s date and the 2020 halving.

Using the assumptions outlined in Figure 1 above, and the network hash rate three months prior to the 2012 halving (~16 TH/s) and the number of bitcoin mined per block (~50), the gross cost to mine one bitcoin is estimated to have been $4.45 prior to the 2012 halving. At breakeven costs of $4.45, miners were operating at healthy profit margins with the exchange price of bitcoin hovering around $9.50 three months prior to the 2012 halving (as demonstrated in Figure 2 below).

Breakeven costs after the 2012 halving

The bitcoin network hash rate reached a near term peak just following the 2012 halving at 26TH/s. Following the 2012 halving, network mining rewards declined from ~50 bitcoin per block to ~25 bitcoin per block. Keeping the above assumptions outlined in Figure 1 constant, while accounting for increased hash rate and reduced mining rewards, the gross cost to mine one bitcoin following the 2012 halving is estimated to have risen to $12.68.

You can utilize TradeBlock’s bitcoin mining page to generate your own assumptions for calculation.

Leading into the 2012 halving, the exchange price of bitcoin rose to levels above our estimated mining breakeven, to trade around $13.50 per bitcoin, allowing miners to operate at profitable levels. If prices had remained steady between $9.00-10.00 per coin following the halving, miners would have been operating at a loss or at breakeven. If this were the case, there likely would have been a sustained hash rate decline following the halving. While the hash rate declined in the weeks following the halving, perhaps given the likely tighter gross profit margins than before the halving, it was only a modest dip and was not sustained.

Estimated miner costs leading up to and following the 2016 halving

Similar to our analysis for the 2012 halving, we estimate miner costs a few months prior to the 2016 halving and immediately following the 2016 halving. Similar to the run up in 2012, three months prior to the 2016 halving, the bitcoin network hash rate reached a new high (~1,250,000 TH/s). The bitcoin network hash rate and other charts and tools can be viewed on the TradeBlock platform.

Breakeven costs before the 2016 halving

In order to estimate mining breakeven costs a few months prior to the second network halving, which occurred on July 9, 2016, we need to outline some assumptions for mining operators during that period. In the figure below we outline device specifications and assumptions that allow us to estimate breakeven costs to mine one bitcoin.

Unlike in 2012, prior to the 2016 halving, dedicated mining devices were frequently used by commercial miners. Bitmain’s Antminer s7 was one of the predominant mining devices during this period of time, and we will use it as a model device to calculate breakevens. We estimate that the majority of equipment operated by commercial miners have similar device specifications as demonstrated below:

Using our above assumptions and the network hash rate three months prior to the 2016 halving (~1,250,000 TH/s) and the number of bitcoin mined per block (~25), the gross cost to mine one bitcoin is estimated to have been $217 prior to the 2016 halving. At breakeven costs of $217, miners were operating at healthy profit margins with the exchange price of bitcoin around $400 three months prior to the 2016 halving (see Figure 5 below).

Breakeven costs after the 2016 halving

Immediately following the 2016 halving, the network hash rate reached a new high of ~1,580,000 TH/s. Block rewards, however, decreased to ~12.5 bitcoin per block. Around this time, Bitmain launched a new and more efficient mining device, the Antminer s9. In our assumptions, we assume that mining operators maintained a fleet consisting 70% of existing models (Antminer s7) alongside 30% of these new, more efficient miners.

Using our assumptions outlined above, we estimate the breakeven cost to mine one bitcoin following the 2016 halving to have risen to $453. Leading into the 2016 halving, the exchange price of bitcoin rallied to above these breakeven levels–around $600 per bitcoin–allowing mining operators to maintain healthy profit margins.

Estimated miner costs leading up to and following the 2020 halving

Using similar methodology utilized in analyzing breakevens in both 2012 and 2016, we estimate breakevens both before and after the upcoming 2020 halving. The next halving is set to occur at block height 630,000 or approximately in mid May 2020. Following the 2020 halving, the block reward will decline to 6.25 bitcoin per block from 12.5.

The largest manufacturer of mining equipment, Bitmain, began shipping its latest highly efficient Antminer s17+ this year. Assuming commercial operators transition 30% of their equipment over to newer models such as the s17+ from existing models, we estimate the breakeven cost to mine one bitcoin before and after the 2020 halving.

First, we estimate that the majority of equipment operated by commercial miners have similar device specifications as demonstrated below. In order to estimate breakeven costs, we make the following assumptions based off device type specifications:

Breakeven costs before the halving

Using our above assumptions, the current network hash rate (~110,000,000 TH/s) and the number of bitcoin mined per block (~12.73, which includes transaction fees), the gross cost to mine one bitcoin at current levels with current device types would be $7,300. Our breakeven price estimate of $7,300 is inline with similar breakevens calculated in other reports: Cost to breakeven $8,000 (11/11/19); Cost to breakeven $7,600-3,600 (12/5/19).

Breakeven costs after the halving

If we assume the network hash rate increases over the next three months at the same growth rate over the last three months, we arrive at a network hash rate of ~135,882,500 TH/s around the time the halving is set to occur. Additionally, let us assume that commercial operators transition over their fleet to newer models, such as the Antminer s17+, for 30% of their rigs, while 70% remain older devices. Following the halving, the number of bitcoin available for miners will decline by nearly half (~6.37–coinbase rewards will fall, but transaction fees will remain).

Using these assumptions, the gross cost to mine one bitcoin at projected levels following the halving would be $15,100. If we adjust our assumption on hash rate, and assume hash rate stays nearly flat from current levels then the cost to mine one bitcoin would fall to $12,600. It is important to note however, that large scale commercial mining pools such as those operated by Bitmain will likely have a lower device price point as they will be utilizing Antminer devices at cost. As such, this would allow breakeven costs to be somewhat lower than the below estimates.

We estimate that bitcoin miners were operating at healthy profit margins before the recent bitcoin crash. While hash rate and network difficulty remain near all time highs, bitcoin prices declined ~30% from levels seen just a few weeks ago. As such, we estimate that miners are now operating at negative profit margins.

Concluding remarks

In analyzing mining breakevens in the prior two halvings in 2012 and 2016, we find that the price of bitcoin rose prior to each event allowing miners to maintain modestly healthy profit margins after rewards were reduced by 50% following each halving. In the previous halvings, had prices remained flat or declined from levels seen three months prior to each halving, miners likely would have been operating around breakeven or at a loss. However, this did not occur as price rallied to above breakeven levels and the network hash rate, despite modest dips, continued its long term trajectory of rising higher. The hash rate did not experience a ‘death spiral’ following prior halvings, which could have occurred had miners been consistently unprofitable.

In 2020, we estimate that miners were operating at healthy margins in the first few months of the year before the recent market crash pushed miners into the red. We estimate miners are currently breaking even around $7,300 per coin, while the market price of bitcoin has hovered around $6,300 following the price decline.

Following the 2020 halving, we project mining breakevens to rise to between ~$12,000-$15,100 per coin assuming the hash rate stays near current levels or rises following a modest growth rate. If the 2020 halving plays out similarly to the prior two halvings, the market price of bitcoin would rise to above these estimated mining breakeven levels around the time the halving occurs.

It is worth noting, however, that conditions today are not the same as they were in the prior halvings when the network was less mature. There exist various differences to consider regarding the 2020 halving; such as less mining operator influence today vs prior halvings, general market risk associated with economic decline around the COVID-19 crisis, and increased mining cost efficiencies to levels greater than we anticipated as well as other factors.

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