Cipher Mining and Stronghold Digital Mining have expanded their Bitcoin operations amid volatility in transaction fees and the approaching halving event.
Cipher Mining and Stronghold Digital have announced significant expansions of their bitcoin mining capacity at the start of the new year, scaling up operations in response to changing market dynamics. These developments come as bitcoin miners adapt to a changing environment where transaction fees are becoming increasingly important for revenue generation, supported by new technologies such as inscriptions.
Bitcoin transaction fees peaked at nearly $40 in mid-December, leading to increased revenue for miners, suggesting Bitcoin is a potential safe haven ahead of its 2024 halving.
Bitcoin miners earn income in two main ways: by generating new bitcoins through mining, and by collecting transaction fees from processing transactions on the Bitcoin network. Since the Bitcoin protocol is designed to halve the mining reward at specific intervals, the importance of transaction fees as a source of income for miners has increased over time.
When transaction fees increase, this directly increases miners’ revenue. For example, high transaction fees provide huge benefits to Bitcoin miners. The recent spike in transaction fees is driven by increased network activity, such as the popularity of the Ordinals Bitcoin inscription.
The increase in transaction fees is a response to network congestion. As the size and number of ordinals cause the memory pool to swell, the Bitcoin network becomes more congested and users are willing to pay higher fees to ensure their transactions are processed and confirmed in a timely manner. This dynamic creates a market where miners can prioritize transactions with higher fees, thereby increasing their income.
The graph below, showing the share of block space occupied by each data type for inscriptions, shows that BRC-20 tokens surpass images around May 2023. The average BRC-20 token uses 60 bytes of space, while BRC-20 tokens use between 300 bytes and 15kb.
In the long run, as mining rewards continue to decrease, transaction fees are expected to become an increasingly important source of income for miners. This shift is expected to ensure the long-term economic viability and security of the Bitcoin network.
Cipher and Stronghold miners buy new machines
Cipher Mining Inc. has unveiled plans for a 60 MW expansion of its Bear and Chief joint venture data center, as well as the purchase of 16,700 new Avalon A1466 miners from Canaan. The increase is expected to take place in the second quarter of 2024 and is intended to increase Cipher's self-mining capacity to approximately 8.4 EH/s. Cipher CEO Tyler Page stressed the importance of this expansion to the company's growth, especially as the industry approaches the 2024 Bitcoin halving event.
Page confirmed, “We expect to add another 2.5 EH/s of machines to our joint venture data center in Texas with this purchase.”
Stronghold Digital Mining Inc. also announced the acquisition of 5,000 Bitcoin mining machines, aiming to increase its mining capacity by nearly 1 EH/s. The additional mining machines will be made up of Bitmain, MicroBT and Caanan mining machines, including 2,800 Bitmain S19K Pro mining machines, 1,100 MicroBT Whastminer M50 mining machines and 1,100 Avalon A1346 mining machines. These mining machines have a computing power of approximately 600 PH/s and an efficiency of 25 J/T and are expected to be put into operation this month. Stronghold's recent update highlighted that Bitcoin equivalent production increased by 2% month-on-month in December 2023, indicating that the company has performed strongly in volatile market conditions.
Singapore-based Canaan Creative has played a key role in these expansions, with new orders totaling more than 17,000 Bitcoin mining machines, highlighting Canaan Creative’s growing influence compared to rivals Bitmain and MicroBT. Canaan Creative CEO Zhang Nangeng expressed enthusiasm for these partnerships, saying:
“The Canaan machine we purchased last year is one of the best performing rigs in our fleet, especially during the hot Texas summers.”
The risks and rewards of relying on transaction fees
While these strategic expansions by Cipher and Stronghold come as emerging technologies such as Inscriptions reshape Bitcoin miners’ revenues, it is not certain that fees will continue to remain at this level. A recent CryptoSlate Alpha Insight shows a surge in transaction fees in 2023, contributing significantly to miners’ revenue streams. With the upcoming Bitcoin halving, which will also cut block rewards in half, miners may become increasingly reliant on transaction fees as their primary source of income.
However, as shown in the chart below, block fees peaked at around $250,000 on December 16 and have since fallen back to an average of $38,000. While this is still significantly higher than the November 2023 average of $4,700, Bitcoin miners may now be betting that Inscriptions will continue to gain traction to offset the upcoming halving.
This shift represents a major transformation for the mining industry, where technological advances and market conditions continue to redefine revenue models and operating strategies.
