Mining economics: energy, subsidy and fees

Wonder

1. What happens to a mining fleet when the block subsidy cuts in half overnight?
2. Why would a miner agree to be paid for switching its machines off?
3. When could fees matter more to miners than newly issued coins?

Explore

1. Mining revenue comprises two distinct streams: the block subsidy and accumulated transaction fees. The subsidy is a fixed amount of new bitcoin issued per block, while fees are variable amounts paid by users to prioritize inclusion. In the early years of the network, fees were negligible, making the subsidy the sole economic driver for participation. As network activity grows, the fee component expands, altering the revenue composition for every miner.
2. Each halving cuts the subsidy, the bulk of a miner’s revenue per block, in half overnight; since April 2024 it has been 3.125 BTC. Unless the price or fees rise to compensate, revenue per unit of hashing power halves at a stroke, and machines whose electricity costs exceed what they earn are switched off. Difficulty then falls at the next adjustment, restoring margins for those who remain.
3. Miners track ‘hashprice’ to evaluate profitability: expected revenue per unit of hashrate per day. Costs include electricity, typically the largest operating expense, alongside capital expenditure for hardware that depreciates rapidly as newer, more efficient machines arrive. When hashprice falls below the cost of energy and depreciation, less efficient machines switch off. This dynamic adjusts network energy consumption automatically in response to market conditions.
4. Miners seek cheap power sources to maintain margins: hydroelectric facilities, stranded or flared natural gas, curtailed renewable energy, and demand-response programs. In Texas, miners participate in ERCOT demand-response schemes where they are paid to shut down during grid stress events. This flexibility allows miners to offset electricity costs with grid services, turning a variable load into a stabilizing asset for local utilities.
5. As the subsidy declines, transaction fees gain relative importance in miner revenue. The April 2024 halving block carried an unusually large fee haul due to the launch of the Runes protocol, which generated significant activity. Fee income has proved volatile: high in bursts of demand, low in quiet periods. Whether fees alone can pay for security once the subsidy is small is one of bitcoin’s open long-term questions.
6. Open a block explorer and inspect a recent halving block. Observe the coinbase transaction containing the reduced subsidy plus accumulated fees from all included transactions. Compare this total reward with blocks mined in 2016 or 2020 to visualize how the fixed component has shrunk while the variable fee component fluctuates based on network demand and protocol activity.

Key facts

Exercise nine, six, three, one

Fact check

Dates, figures and claims checked against the published sources listed below.

• A. M. Antonopoulos & D. A. Harding, Mastering Bitcoin, 3rd ed. (2023), ch. 12
• Cambridge Centre for Alternative Finance, Mining Industry Reports
• ERCOT Demand Response Documentation
• Hashrate Index (Luxor), Hashprice Methodology