Difficulty, Fees, and the Squeeze on Bitcoin Miners

Briefing Notes contain: (1) a summary of podcast content; (2) potential information gaps; and (3) some speculative views on wider implications for Bitcoin. Most summaries are for Bitcoin-centered YouTube episodes but I also do some on AI and technological advance that spill over to affect Bitcoin.

Summary

The November 21, 2025 episode of McNallie Money features Kaan Farahani and Anthony Power dissecting October Bitcoin mining data and sector trends. They explain how rapid difficulty growth, historically weak transaction fees, and capital-intensive hardware upgrades are exerting sustained pressure on miner margins. Their analysis highlights shifting hash rate geography, rising competition from AI and high-performance computing for power, and growing reliance on hosting models and derivatives to keep mining operations viable.

Take-Home Messages

1. Difficulty-driven extra halvings: Persistent difficulty growth is effectively halving Bitcoin-denominated hash price every 16 months, compressing miner revenue between scheduled subsidy cuts.
2. Fee dependence shortfall: Transaction fees remain near their weakest share of block rewards in more than a decade, leaving the security budget overwhelmingly reliant on the block subsidy.
3. Geographic rebalancing of hash rate: Hash rate is gradually shifting toward the eastern hemisphere, with the United States, China, and Russia anchoring a more concentrated but geographically diverse mining landscape.
4. Capital and power constraints: ASIC efficiency races, rising power prices, and competition from AI and high-performance computing are making hardware refresh cycles and energy procurement more capital-intensive and strategic.
5. Financialization of mining: Hosting, cloud mining, and forward hash rate derivatives are becoming central tools for redistributing risk and stabilizing cash flows in an increasingly unforgiving mining environment.

Overview

Farahani begins by walking through Luxor’s October 2025 Bitcoin mining data, emphasizing an 8.4% month-over-month increase in network difficulty and a 30-day average hash rate around 1,100 exahashes per second. He notes that block times averaged roughly 9 minutes and 30 seconds, with most days running faster than the 10-minute target, implying that significant new hash rate continues to come online despite deteriorating economics. This framing sets the stage for his argument that difficulty, rather than Bitcoin’s nominal price, has become the dominant force shaping miner revenues.

He then introduces the idea of “extra halvings,” explaining that since 2021 difficulty has roughly doubled every 16 months, effectively halving Bitcoin-denominated hash price between scheduled subsidy events. Farahani argues that this dynamic creates a hidden schedule of revenue shocks that many investors and even some operators fail to fully appreciate when modeling mining businesses. Power reinforces this point by observing that miners now plan around both the four-year halving cycle and an implicit difficulty cycle that can be just as disruptive.

The discussion turns to transaction fees, where Farahani notes that average fees per block in October fell to about 0.022 Bitcoin, their lowest Bitcoin-denominated level since 2011 and less than 1% of total block rewards. He contrasts this with 2024, when average fees were roughly ten times higher even excluding the 40-Bitcoin “outlier” halving block, underscoring how much fee income has evaporated. Both guests stress that earlier assumptions about fees gradually replacing the subsidy have not materialized, leaving miners heavily exposed to subsidy cuts in a context of weak, bimodal fee dynamics.

Power adds a geographic perspective using Luxor’s global hash rate heat map, which shows slowing growth in North America and modest increases in the eastern hemisphere. He notes that the United States, China, and Russia remain the top mining countries, with meaningful but smaller contributions from Central Asia, the Middle East, and parts of Latin America. This pattern reflects where cheap or stranded energy, flexible regulation, and data-center infrastructure align to support continued hash rate deployment even as sector margins tighten.

Stakeholder Perspectives

1. Public mining companies: Must manage investor expectations, balance sheets, and hardware refresh plans while facing compressed margins, volatile fees, and pressure to diversify into hosting or alternative compute.
2. Private miners and hosting providers: See opportunities to acquire distressed assets, secure long-term power contracts, and grow market share by offering infrastructure, risk-sharing, and white-label services to capital-constrained clients.
3. Energy producers and grid operators: Weigh whether to allocate scarce power to Bitcoin mining, AI, high-performance computing, or grid services based on returns per watt, contractual flexibility, and regulatory risk.
4. Institutional investors and lenders: Evaluate miner creditworthiness, hedging strategies, and exposure to difficulty-driven “extra halvings” when deciding whether to finance new capacity, refinance existing debt, or exit the sector.
5. Bitcoin users and policymakers: Monitor how fee weakness, subsidy dependence, and hash rate concentration affect long-term network security, censorship resistance, and potential calls for regulatory intervention or industry support.

Implications and Future Outlook

Difficulty-driven “extra halvings” and structurally weak fees imply that only miners with superior efficiency, low-cost power, and disciplined risk management will remain competitive over the next halving cycle. Operators unable to turn over their fleets or lock in favorable power deals may find that even brief downturns in hash price can trigger insolvency. Over time, this selection pressure is likely to produce a more consolidated mining landscape dominated by industrial-scale firms and specialized hosting providers.

The intersection of mining, AI, and high-performance computing creates a new competitive arena where power is the scarce input and compute workloads are increasingly fungible. Farahani’s energy hash price framing suggests that miners will need to justify their power use not just against other miners, but against data-center operators and grid services offering different revenue and risk profiles. Regions that can combine cheap, reliable energy with predictable regulation may emerge as global hubs for both Bitcoin mining and advanced compute, while others see capacity redirected to higher-yield uses.

As hosting, cloud mining, and forward hash rate derivatives mature, mining may come to resemble a financialized infrastructure sector where risk is sliced and redistributed among operators, customers, and capital providers. Successful firms will likely integrate physical operations with sophisticated treasury management, using hedging to convert volatile hash price into more predictable cash flows. For users and policymakers, the key question will be whether this evolution strengthens Bitcoin’s security budget and decentralization, or concentrates critical infrastructure and financial risk in a smaller set of highly leveraged actors.

Some Key Information Gaps

1. How will continued difficulty-driven “extra halvings” reshape the economics and survival prospects of different types of Bitcoin miners over the next halving cycle? Understanding this dynamic is essential for anticipating which business models remain viable and how hash rate concentration may evolve.
2. How sustainable is the current security budget if Bitcoin-denominated fees remain at or near their lowest levels since 2011? Clarifying this issue will inform debates about long-term network security, miner incentives, and the robustness of Bitcoin’s monetary policy.
3. How should miners quantify and compare expected returns per watt from Bitcoin mining versus AI and high-performance computing workloads when allocating scarce power capacity? Developing robust comparative frameworks will guide capital allocation decisions for operators, energy producers, and data-center developers.
4. How will compressed margins and announced exit plans among public miners reshape the balance of hash rate between listed firms, private operators, and state-linked entities? Answering this question will help assess future transparency, geopolitical risk, and potential regulatory responses around mining concentration.
5. Under what circumstances do forward hash rate derivatives provide the greatest benefit for miners in terms of additional Bitcoin or dollar revenue? Identifying these conditions will support better risk management practices and inform the design of derivatives markets that enhance, rather than undermine, sector resilience.

Broader Implications for Bitcoin

Industrialization and Concentration of Hash Power

As difficulty-driven “extra halvings” and capital-intensive hardware cycles filter out weaker operators, Bitcoin mining is likely to become even more industrial and concentrated over the next 3–5 years. Large firms with access to cheap capital, integrated energy strategies, and sophisticated treasury operations will gain a structural edge over smaller, undercapitalized miners. This consolidation could improve operational efficiency but also raise policy questions about systemic risk, market power, and the balance between economic efficiency and decentralization.

Energy Market Integration and Digital Infrastructure Planning

The competition between Bitcoin mining, AI, and high-performance computing for power implies that energy and digital infrastructure planning will increasingly be made on an integrated basis. Over the medium term, jurisdictions that coordinate grid upgrades, renewable buildout, and data-center policy may attract both mining and advanced compute, creating regional clusters of programmable load and flexible demand. This convergence will push regulators, utilities, and investors to treat mining not as a niche activity but as one component of broader energy-market design and industrial strategy.

Financialization of Mining and Systemic Risk Management

The growing use of hosting contracts, cloud mining, and forward hash rate derivatives signals that mining is becoming deeply embedded in financial markets. Over time, more sophisticated hedging structures, leverage, and structured products could improve capital efficiency but also import familiar financial-sector vulnerabilities into Bitcoin’s security layer. Policymakers and industry participants will need to consider how to balance innovation in risk management with safeguards that prevent cascading failures from over-leveraged or poorly supervised mining-linked financial instruments.

Security Budget Narratives and Policy Debates

Persistently low fees and heavy dependence on the block subsidy challenge earlier narratives that transaction fees would seamlessly replace the subsidy as the main pillar of the security budget. If this pattern continues, debates about Bitcoin’s long-term security may shift from purely technical and ideological arguments toward more empirical assessments of fee dynamics, user behavior, and miner economics. These discussions could influence everything from institutional adoption and reserve strategies to public rhetoric about whether Bitcoin’s security model remains robust as halvings continue.

Cross-Border Governance and Regulatory Competition

Shifting hash rate toward the eastern hemisphere and concentration in a few major jurisdictions will sharpen cross-border governance questions around mining standards, environmental oversight, and financial scrutiny. In a 3–5 year horizon, countries that combine clear rules with competitive energy pricing may draw in a disproportionate share of hash power, while others attempt to regulate or tax mining more aggressively. This regulatory competition will shape not only where blocks are produced but also how mining is perceived in broader debates about energy, climate policy, and digital sovereignty.