articles Ratings /ratings/en/research/articles/240501-your-three-minutes-in-digital-assets-can-bitcoin-mining-outlive-block-subsidies-13092110.xml content esgSubNav
In This List
COMMENTS

Your Three Minutes In Digital Assets: Can Bitcoin Mining Outlive Block Subsidies?

COMMENTS

Table Of Contents: S&P Global Ratings Credit Rating Models

COMMENTS

U.S. Leveraged Finance Q1 2024 Update: For Most 'B-' Rated Issuers, Solid Businesses Have Shaky Finances

COMMENTS

Credit Trends: U.S. Corporate Bond Yields As Of May 22, 2024

COMMENTS

Credit FAQ: U.S. Digital Publishers Have Cause For Concern Over Google's AI Overviews


Your Three Minutes In Digital Assets: Can Bitcoin Mining Outlive Block Subsidies?

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

image

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

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in