Bitcoin's Declining Network Activity and Miner Revenue: Assessing Long-Term Sustainability and Capital Reallocation Opportunities

The Bitcoin mining industry is at a crossroads. Post-halving dynamics, shifting transaction patterns, and the rise of Layer-2 solutions have created a landscape where miner profitability is increasingly decoupled from traditional blockspace demand. As the network's economic model evolves, investors must reassess the sustainability of mining operations and identify capital reallocation opportunities in alternative blockchain infrastructure.

The Post-Halving Dilemma: Block Subsidies vs. Transaction Fees

The 2024 halving, which reduced block rewards from 6.25 to 3.125 BTC per block, marked a structural inflection point for miner economics. While Bitcoin's price doubled post-halving, temporarily offsetting revenue losses, the long-term viability of mining now hinges on operational efficiency and alternative income streams. Transaction fees, which contribute only 1-2% of total miner revenue in most periods, have become increasingly volatile. During peak demand events-such as the halving block-fees can spike to over 40 BTC in combined rewards and fees, but these spikes are rare and unpredictable according to data.

By Q4 2025, the situation had worsened. Transaction fees fell to historic lows, representing less than 1% of total block rewards in May and June 2025. This decline coincided with a drop in on-chain activity, as active addresses fell to a one-year low of 660,000 by late 2025. The reduced demand for blockspace has forced miners to rely almost entirely on block subsidies for survival, a trend that will intensify with each subsequent halving cycle.

Layer-2 Adoption and the Blockspace Paradox

The rise of Layer-2 solutions, particularly the Bitcoin Lightning Network, has further strained miner revenue. Institutional adoption of Lightning has surged, with capacity reaching 5,637 BTC by late 2025, driven by entities like Binance and OKX. Enterprise-grade implementations, such as Steak 'n Shake's global Lightning integration, have demonstrated the network's utility for low-cost, high-volume transactions. Meanwhile, innovations like Taproot Assets have enabled stablecoin transfers over Lightning, addressing a critical barrier to adoption.

However, this growth has come at a cost. Retail transaction activity on the base layer has stagnated, with on-chain activity dipping to a one-year low. Platforms like Cash App and Strike, which rely on Lightning for instant payments, have reduced reliance on on-chain transactions, further diminishing blockspace demand. As a result, miners face a paradox: while Layer-2 solutions enhance Bitcoin's scalability and utility, they also erode the fee revenue that could sustain mining operations in the long term.

Capital Reallocation: From Mining to AI and Institutional Infrastructure

Faced with declining margins, miners have pivoted to alternative revenue streams. The most notable trend is the shift toward artificial intelligence (AI) and high-performance computing (HPC) infrastructure. By Q4 2025, 61% of capacity at Bitcoin miners with AI colocation deals had been repurposed for AI workloads. Core Scientific, for instance, secured a $3.5B contract with CoreWeave, expanding its capacity to 590 MW and projecting $10.2B in revenue. Similarly, Applied Digital's 150MW lease agreement in North Dakota brought its anticipated contracted revenue to $11B according to data.

This pivot underscores a broader shift in the industry: power assets are becoming more valuable than hashing power. Miners with access to low-cost electricity (below $0.06/kWh) and scalable infrastructure are well-positioned to capitalize on the AI boom, even as Bitcoin mining margins compress. For investors, this represents a strategic opportunity to allocate capital to firms leveraging their energy and hardware advantages in the AI ecosystem.

Institutional Adoption and the Future of Miner Incentives

The long-term sustainability of Bitcoin mining will also depend on institutional adoption and regulatory clarity. By early 2026, global crypto ETPs had recorded $87B in net inflows since 2024, signaling growing institutional confidence. Regulatory developments, such as the U.S. bipartisan crypto market structure legislation, are expected to deepen integration between public blockchains and traditional finance, potentially boosting demand for on-chain transactions.

However, this transition is not without risks. The Lightning Network's dominance in retail transactions and the macroeconomic uncertainty surrounding Bitcoin's role as a store of value could delay the emergence of high-value blockspace demand. For miners, the path forward may require diversification into institutional-grade Bitcoin plays-such as custodial services, ETPs, or tokenized asset platforms-that align with the asset's evolving utility.

Strategic Implications for Investors

The Bitcoin mining sector is undergoing a fundamental transformation. While the post-halving environment has eroded fee revenue and compressed margins, it has also catalyzed innovation in efficiency and capital reallocation. Miners with access to low-cost energy and scalable infrastructure are best positioned to navigate this transition, particularly those pivoting to AI and HPC.

For investors, the key takeaway is clear: the future of Bitcoin's economic model lies not in the base layer alone but in the broader ecosystem of infrastructure and institutional adoption. As block subsidies continue to decline, capital must flow toward solutions that sustain miner incentives-whether through Layer-2 innovations, AI infrastructure, or regulated financial products. In this new era, the most resilient players will be those that adapt to the shifting dynamics of a maturing market.