Bitcoin mining difficulty rises for first time immediately after a halving amid Runes fee frenzy

Bitcoin BTC +1.62% mining difficulty rose 2% on Wednesday to hit a new all-time high in the first adjustment since last week’s halving event.

The difficulty adjustment came at block height 840,672, reaching a record of 88.1 trillion, according to Bitbo data — marking the first time Bitcoin mining difficulty has risen in the first adjustment following a halving.

In comparison, the first Bitcoin mining difficulty adjustment after the halvings in November 2020, July 2016 and May 2020 came in at -2%, 0% and -6%, respectively. The second adjustments post-halving were even more pronounced at -12%, -5% and -9%, respectively. This happened in the past as the reduction in block subsidy rewards caused miner profitability to decline sharply as less efficient or financially prepared miners shut off their machines.

Bitcoin mining difficulty measures how hard it is to mine a new block relative to the easiest it can ever be. It adjusts automatically every 2016 blocks — roughly two weeks — to ensure that, on average, a new block is found every 10 minutes, regardless of how many miners are actively mining.

Bitcoin mining difficulty. Image: Bitbo.

Why this time is different

So what’s different this time around? While miners’ block subsidy rewards have now been reduced from 6.25 BTC to 3.125 BTC, they continue to earn additional transaction fee rewards for each block mined as normal.

In previous halvings, transaction fee rewards were insufficient to stave off a reduction in Bitcoin’s hash rate, which measures the total computational power dedicated to the network by miners, immediately following the events.

This time, hash rate has remained near all-time highs, according to The Block’s data dashboard. Hash rate has risen from a seven-day moving average of 630 EH/s in the final difficulty adjustment pre-halving to 640 EH/s in the first one that followed, as miners’ transaction fee rewards surged post-halving.

After halving block 840,000 generated $2.4 million in fees — far exceeding the approximate $200,000 worth of block subsidy reward — bitcoin went on a record 104-block run of transaction fee rewards higher than the subsidy, according to the Bitcoin explorer Mempool.

Bitcoin mining rewards. Image: Bernstein.

In fact, aside from an apparent accidental $3 million overpayment last November, all of Bitcoin's top 10 most valuable blocks have been mined since the halving.

While transaction fee rewards have since reduced considerably, they still account for around 40% of total block rewards on a seven-day moving average basis compared to around 10% before the halving, per The Block’s data dashboard. While the block subsidy has dropped, this transaction fee element equates to around 67% of miners’ subsidy revenue compared to around 12% pre-halving.

Runes hype sparks activity surge

Much of the transaction fee activity can be attributed to the hype surrounding Runes — a new fungible token standard for Bitcoin launched at the halving. “This is driven by speculative activity to mint new tokens (mostly meme tokens) by retail traders,” analysts at research and brokerage firm Bernstein said earlier this week.

The Runes protocol was developed by Ordinals creator Casey Rodarmor, offering a more efficient solution for “etching” (creating) tokens on Bitcoin compared to BRC-20 tokens that use Ordinals inscriptions.

Following the initial hype, average transaction fees dropped considerably from a record high of $128.45 on the day of halving to $34.80 on April 21, per YCharts data. Average fees are now back down to around $5, according to Mempool data.

However, Runes still account for around 42% of current Bitcoin transactions, down from a peak of 81% on April 23, according to a Dune dashboard by cryptokoryo. There are over 3 million Runes transactions processed since launch. Regular bitcoin transactions account for 54%, Ordinals 1% and BRC-20 tokens 3%. These Runes transactions have generated more than 2098 bitcoin ($130 million) in fees in the first six days of launch.

Bitcoin transactions by type. Image: Dune Analytics.

According to Runes explorer Unisat, around 11,000 Runes tokens have been minted so far, with “DOG•GO•TO•THE•MOON,” otherwise known as simply “DOG” being the most held. DOG is related to the Runestone NFT collection from Bitcoin Ordinals explorer Ord.io co-founder Leonidas.

Despite the current transaction fee rewards windfall, the impact on hash rate as the hype subsides and bitcoin’s price fluctuates remains to be seen. However, the Bernstein analysts added that they expect 15% of miner revenues to come from transaction fees on a sustainable basis.

Bitcoin mining industry matures

Beyond the current transaction fee windfall, the increase in total hash rate and difficulty immediately following the halving may also speak to the maturity of the Bitcoin mining industry, evolving from home miners and small-scale operations to much larger scale, well-capitalized facilities. 

While consolidation of mining operations toward large public companies presents centralization concerns in terms of hash rate, gone are the days when small or home mining operations, more susceptible to the drop in subsidy rewards that accompany each halving, were generally profitable.

Public miners considerably built up their operations in the prior halving cycle with Bernstein analysts Gautam Chhugani and Mahika Sapra expecting the industry to further consolidate toward four leading public miners: CleanSpark, Marathon, Riot Platforms and Cipher Mining.

Despite negative headlines on miner revenue impact, with many stocks down over the last 30 days and public miners generally underperforming bitcoin year-to-date, some miners are still at all-time highs in terms of U.S. dollar revenue, providing solid balance sheets post-halving alongside relatively low debt, the analysts pointed out ahead of the halving.

With Bitcoin’s fourth halving event now out of the way, attention is being drawn toward what happens next before the next one, estimated for April 2028, with Bitwise CIO Matt Hougan recently making five predictions, including a $250,000 price target.