In around two year’s time (on May 27, 2020, unless wild swings in the mining hashrate change anything) the coin reward for mining new Bitcoin blocks will drop from 12.5 Bitcoin to 6.25 Bitcoin — and people are already thinking about what this could do to the Bitcoin price.
Much has changed for Bitcoin, cryptocurrency and blockchain since the last Bitcoin halving (something the community calls a halvening), which happened July 9, 2016, and each time it happens no one is entirely sure how the Bitcoin price, or the economy that has built up around it, will react.
A Bitcoin halvening — there have been two since Bitcoin’s creation in 2009 — is a fixed event and will occur after every 210,000 blocks are mined, or confirmed, by the system.
Some 12 months after the first Bitcoin halving event in November 2012, the Bitcoin price reached what was then an all-time high of $1,000.
The 2016 halvening heralded last year’s bull run which peaked in December 2017 with the Bitcoin price reaching an eye-watering $19,000.
Since then it’s fallen sharply back — but the same happened after the 2012 halvening and subsequent boom, with the Bitcoin price falling as low as $200 per coin before picking up in the lead up to the 2016 halvening.
While the Bitcoin price has climbed somewhat ahead of both subsequent halving events, the price has gone on to boom in the subsequent 12 or so months.
Many Bitcoin and financial experts think this is similar to the way traditional markets price in changes to interest rates or changes to commodity supply.
“Previous halvenings have shown negligible impact on Bitcoin’s price. This is because — rather like a much anticipated interest rate cut — everybody already knows it’s going to happen way in advance,” said Glen Goodman, Bitcoin analyst and author of forthcoming book The Crypto Trader.
If the market knows the supply is due to be reduced at a certain time, and by what it will be reduced by, it will begin applying that reduction to the price gradually — avoiding sharp spikes and dips.
“Historically the cut has had very little immediate impact, although the price usually rose after,” said Chris Wilmer, professor at the University of Pittsburgh and co-author of Bitcoin for the Befuddled.
The rise in price makes sense in so far as large buyers of Bitcoins have to either buy on the market or get them through mining, and after a halving event it forces more people to buy on the market.
“Cryptocurrency markets are often very event driven, and as we get closer to the next halving bitcoin’s price will receive a boost from those anticipating the forthcoming reduction in new supply,” said Garrick Hileman, head of research at Blockchain and co-founder of Mosaic. “In the months leading-up to the last two halving events we saw bitcoin’s price steadily trend upward, and then power higher following the reward halving.”
There are more factors in play, however…
Thorsten Koeppl, professor of economics at Queen’s University in Canada, said: “It appears to us, any cryptocurrency should economically do the opposite of what Bitcoin is doing.
“The value of Bitcoin is partly driven by its potential as a payments tool and, before the fees rose along with the price, there were people using Bitcoin for international transfers. This has become more expensive to do now. But the price is still being supported.”
The increase in fees over the last couple of years — along with the rise in Bitcoin price — is a direct result of more people using the Bitcoin network.
In December there were roughly 400,000 transactions per day though this has now fallen back to around 200,000 transactions per day, and fees are back down with it.
As the Bitcoin reward for mining new blocks on the blockchain falls, miners will increasingly rely on fees, which they get as an incentive to confirm Bitcoin transactions.
Miners use the miner fees attached to transactions to decide which ones to confirm — choosing the biggest ones first. Eventually, once all the 21 million possible Bitcoins are mined, miners will rely entirely on these fees for their income.
The Bitcoin halvening and miners
Those first affected by a Bitcoin halvening are the miners, with new Bitcoin coming at the expense of computer processing time and electricity.
In recent years the cost of mining has risen significantly, although both big Bitcoin mining consortiums and smaller miners are still able to make money despite some claiming Bitcoin mining globally is now using more electricity than the whole of Ireland.
But for miners, a halvening means a big drop in revenue.
Ahead of the second halvening in 2016 the price of Bitcoin at the time meant one block mined resulted in new Bitcoin worth around $16,000. That would have fallen to $8,000 directly after the halvening.
However, it’s possible for the network to balance itself. As mining difficulty increases, fewer miners will be able to continue.
“If the potential rewards from mining are lower because of the halvening, that may discourage many people from mining Bitcoin”, according to Goodman.
But the beauty of the Bitcoin protocol means that if hashing power leaves the network then the difficulty of mining a new block will automatically be reduced. So less hashing power and less electricity will be required to mine each new Bitcoin.
Hileman added: “I do not anticipate a significant change in the total mining hash rate due to the halving, at least not in the short run. Miners have historically shown a willingness to maintain or increase computing power through halving events because they expect future bitcoin price increases to offset the reduced block reward.”
Meanwhile, if the price of Bitcoin rises enough — or is pushed higher by the miners who now need to be better compensated by fewer coins per block — there will be as many miners as before.cn