The Bitcoin Halving: Deflating the Hype

By Bitcoinist.net Sep 25, 2015 12:00 PM EST

The approaching halving of Bitcoin’s block reward is the subject of much optimism among Bitcoin enthusiasts and price speculators. Hardcore believers, uncaring about its exchange rate, look forward to the “halvening” as a milestone in Bitcoin’s history. Each block reward halving represents a triumph for Bitcoin, for they signify that Bitcoin has remained relevant enough for mining to continue. Speculators, on the other hand, look to the halving as a source of hope. Since the block reward will be cut in half, supply will not grow as rapidly. This fact leads many to believe that the Bitcoin price will skyrocket upon the halving, securing them handsome profits.

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bitcoin-495997_1280Those who view the block reward halving as a milestone in Bitcoin’s journey of struggle and triumph will have a lot to celebrate. The block reward only gets cut in half after a certain amount of the total supply has been mined. Therefore, the only way these halvings will continue is if miners continue to hash out blocks. And what is the only way to ensure the mining process continues? Bitcoin’s relevance is the key to this question; miners will only continue mining if there is a profit to be made from Bitcoin, which means people have to use and value the digital currency. Thus, a block size halving signifies that Bitcoin is still relevant, and it remained relevant for a significant amount of time.

So of course we should celebrate the halving as a sign of Bitcoin’s triumph in the face of such harsh criticism. Each time the block reward gets cut in half, we get one step closer to a sort of “completion,” one step closer to a maxed out supply. These halvings will likely only continue as long as Bitcoin is valuable enough to profitably mine, which means that each additional halving will be accompanied by continuous and unyielding success. Certainly a cause for celebration.

Speculators, on the other hand, probably won’t have much to celebrate when the halving comes. These people think the price will skyrocket when the block reward diminishes. On the surface, that belief really makes sense. Supply shrinks relative to demand, so the price goes up. However, that isn’t exactly how the halving works. The actual supply will not decrease, rather, the rate of growth will slow. The supply, the amount of coins in existence, will still grow continuously. Thus, there is nothing about the halving to lead us to say with certainty that demand will outstrip supply and send the price soaring.

For the price to rise in response to the halving, demand will still have to overcome the amount of coins already in existence, in addition to the new coins being mined — even though they are being mined at a slower rate. In order for the price to really go up, demand would have to rise constantly while the growth in supply slows, until the growth in demand surpasses growth in supply. That doesn’t seem likely right now, though, since the price has remained fairly constant for almost a year — indicating that Bitcoiners are in some sort of holding pattern with their valuations.

Bitcoin miners have even less to be excited about. With their income essentially cut in half, while difficulty and expenses continue to rise, miners will have to take drastic measures to stay afloat. Part of this may include selling an even larger portion of their Bitcoin revenues, which would actually put additional downward pressure on the Bitcoin price.

tumblr_inline_nb2p6gus311qegt1fThe increased costs and diminished revenue associated with the halving will almost certainly result in greater mining centralization. Consolidation of the mining network is driven by economies of scale, in which mining firms grow in size in order to produce more efficiently and minimize costs. A more centralized Bitcoin mining network will increase its vulnerability to attacks, and will make it easier to take the network down. Presently, the only surefire way to avoid these difficulties is to make mining hardware more energy efficient, lowering the cost of mining and thereby easing the tendency to centralize.   

So, looking at the raw economics of the block size halving, it actually seems like it might be a pretty stressful time. Of course, we won’t know for sure how significantly these negative impacts will be until the halving actually comes. The only real experience we have with a “high stakes” block reward halving is Litecoin’s recent one; the Litecoin price has remained virtually untouched by the halving, and so far mining has remained unaffected. What we can tell from this purely theoretical analysis, though, is that aside from speculative price fluctuations, Bitcoin’s approaching halving will likely be anti-climactic at best, and very troubling at worst.

What do you think will happen during the block size halving? Let us know in the comments below!


 

Images courtesy of Pixabay and Bitcoin Miner

The opinions expressed in this article do not necessarily reflect those of Bitcoinist.net.

Originally posted on: The Bitcoin Halving: Deflating the Hype

Facebook Comments


  • Caps

    This person doesn’t know what they are talking about.

  • Shawn

    The truth is everyone who owns a bitcoin can trade for what ever value he seems to find fit for his mining services, so if you lose profits in the mining because of the halving, that will make miners demand a higher value for their coin to recover the halving, this is all done through trade so if everyone wants to start trading at five hundred then that’s the value of the coin in reality, as we near closer to that halving period the demand for the coin should increase because losing fifty percent of the current reward is going to make a large dip in the spliting of shares of the coin in the mining pool, so that it does not have a large effect on the miners we need to start demanding a higher value for bit coin gradually as we near to the halving point.

  • Clum

    For a potential investor it is very good to hear an oppinion that goes against the optimistic valuations predicted to come from the reward halving. Looking at the last halving however it is apparent it caused a price bubble that eventually burst as it was not a true reflection of value but rather a reflection of mass psychology. Initially those predicting a price rise will have triggered an upwards trend and with it created a positive feedback loop causing even more people to buy into the hype. I expect this to happen again however I am not sure to what degree. On one hand there is a much better understanding of Bitcoin halving and many purests would prefer less volatile fluxations in price to give the currency more credibility. On the other hand however there are a lot more people using Bitcoin since the last halving and could easily cause an even bigger price bubble. If anyone has an argument/point/comment to make on the affect halving will have on the market price please to reply to my comment as I am eager to hear and learn as much as I can!

  • Amen

    In the time since, we’ve seen the beginning of an upslope. It hasn’t risen exponentially yet, but it looks like the price could balloon in as early as late January. Hopefully it doesn’t prematurely pop, because the longer it’s suppressed, the more powerful its spike!

  • Brilliant. Thank you for the new angle on the halving event. It was the first, and it’s only one string of data points spaced out, but it does show accurate price fluctuations minus volatility. 145% increase the first 6 months, and 940% the next 6 months afterwards.

    So $450 in January, $1,100 in June and $11,500 by years end? I’d love to see the pure supernova strength during those times, and what fraction of power that equates to the BTC market right now. (Coinbase offers some hint into their year-in-review blog. Anyone have any more concrete data to back up the power expected in this next pop?

  • Brian Algeen

    I would say to sell just before the halving as you’ve said, this would ensure there was no drop half way through you selling your bitcoins. This is assuming you have 200+ you’re selling that would take some time to sell.

  • snizzar

    So when would you say is the best time to cash in your current BTC? A good amount of time before the halve and then buy some more when it drops off before the demand stabilizes again? Just curious.

  • Brian Algeen

    This article is pretty poor in my opinion, by the authors statement the high supply right now would mean the price was decreasing. But it has been very stable, this means that the increasing supply is met by increasing demand at an equal rate.

    When the bitcoin mining halves the demand will still be increasing as it has the past year with total consistency, the difference is that the rate of supply will be reduced and so the value will increase. This increase of value per bitcoin will mean that the miners are making less supply but achieving the same profit because it bit is worth more.

    The plateau will occur when the demand levels off to the same rate as supply, as is the situation we have right now. The only thing that will topple this is if the momentum of the price rise just before the halve and the subsequent price rise from the halving causing a lot of people to cash out at once – if this happens the price will drop suddenly and there will be issues for the miners in terms of cost vs reward.

    Having said that the sudden low price may cause people to buy back in and the price will again rise.

    Either way the halving will certainly result in a higher bitcoin price average through the year, likely 800USD+ with consistency.

  • tb1981

    If the demand stays the same then reduction of mined and sold coins should increase the price. Think about it…. when Louisiana was hit by that hurricane and all the shrimp boats were destroyed except a few. Forrest Gump made a killing not because he was getting a lot of shrimp. He made a killing because the demand was the same but with the lack of shrimpers not as many shrimp were available to meet the regular/normal/usual demand.

  • stckpkr7000

    I don’t buy into the article’s take away. It’s a basic supply vs demand issue at play. The current price has been fairly steady for about 10 months now. This means people are buying the new coins flowing into the float. That number will be halved in July of 2016 and price can only go up if demand remains the same. Yes, demand could decrease, but demand could actualy increase as well. if so, it would be a one two punch to higher prices. Increasing demand with half the number of new coins entering the BTC ecosystem. Sometimes things really are basic common sense. I suspect BTC price will start rising well in advance of the actual halving date.

  • Russell Spears

    The only response may be less miner investments from big farms, still with the faster ASIC hardware there will just be room for a few of the other little guys to jump in. The hash rate may not even be affected at all. The network will move on, in fact the big boys are already thinking about that date because Bitcoin has a very clear predictability from the start (We know the halving routine all the way to 2140). The guys running this are smart and have long and short term vision.

  • Tone Engel

    Generating a block, by itself, doesn’t produce any bitcoin. It is the block reward transaction that a new block is allowed to contain that creates new bitcoin.

    For all those of us who have bought some of these mined bitcoin with $$, the block rewards are effectively a tax on the store of value paid to reward those who secure the store of value. Halving the block reward halves the tax creating the potential for an increase in the price of bitcoin. If the price rises a bit, and if the difficulty doesn’t drop much then it very much will be a milestone in the success of the currency.

  • Andre

    Perhaps it’s interesting to look at what happened the last time the block reward was halved, on 28 November 2012. The price at the day of the halving was about $12.50. Half a year before that date, it was $5.10. Half a year later (7 weeks after the peak of April 2013), it was $130.

  • Steven Phelps

    A key premise of this article is incorrect: Bitcoin is generated at a fixed rate (one block every ten minutes, on average), irrespective of its continuing “relevance” in the market. What may change is the amount of computing power required to mine a block. So if bitcoin plummets in popularity and value, for example, blocks will simply become easier to mine. The approaching “halving” event implies nothing at all about the success of the currency.

  • Black Dynamite

    Uhhhhh…..why would “Bitcoinist.net” post an article, as the author, on InsideBitcoin.com?

    He must really hate Bitcoinist.net!
    BD

  • Black Dynamite

    With demand consistently rising, and availability of news Bitcoin reducing by half, that should cause a slow increase over the second half of 2016. BUT miners will be selling more BTC to stay afloat, mitigating the market gains.

    Maybe some app in the next year will make it that much easier to gain and secure BTC, and boost demand? Maybe more fiat markets will collapse, boosting digital currency asset demand?

    Well done article.
    BD

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