Less than half a year is left before the next Bitcoin block reward halving is going to occur, and the crypto-scene is intrigued by future price speculation and worries about several key elements of the industry such as the mining ecosystem.
In this article, we'll explain in layman's terms what Bitcoin 'halving' really means and how it could potentially affect the Bitcoin ecosystem.
Unlike fiat currencies, where the respective issuer, eg. a central bank, could 'print' as much as it pleased, Bitcoin is a deflationary digital currency that is pre-determined to be capped at 21 million BTC, similar to the "hard-cap" of the earth's gold reserves.
New BTC enters the circulating supply through miners, who get compensated for providing computational power to secure the network and verify transactions with a fixed amount of BTC.
In the early days of Bitcoin, a miner could use anything between a laptop or a net-cafe computer to 'mine' and get some BTC. Now, Bitcoin mining has become a proper industry, and a sizeable investment in specialized mining hardware is required to compete.
The initial reward for mining a Bitcoin block was 50 BTC, and this reward has dropped two times to 25 BTC and 12.5 BTC, respectively.
Of course, 12.5 BTC is worth a lot more than a couple of dollars nowadays, but the processing power and electricity consumption required in order to achieve 'solving' a block has dramatically increased.
Satoshi Nakamoto, the moniker used to mask the creator(s) of Bitcoin, explained the reasoning behind halvings as follows:
"The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase."
"Coins have to get initially distributed somehow, and a constant rate seems like the best formula."
How will the next halving affect mining operations?
Due to the Proof-Of-Work (PoW) architecture, miners are an indispensable element element of the Bitcoin blockchain.
Essentially, miners lend their processing power to the network, trying to solve complex mathematical problems required to securely confirm, promote, or deny a Bitcoin transaction with decentralized integrity.
For their efforts, miners are rewarded with the 'block reward'. As previously mentioned, not only does the block reward drop by half every 96 months, but the processing power required to mine a block is getting extremely higher as more and more miners enter the scene.
During the annual World Digital Mining Summit (WDMS) 2019, Dr. Mervyn G. Maistry, a board member at Cyberian Mine, revealed that mining operations are currently barely making profit to miners who sometimes have to pay around $7k in electricity fees, in order to mine a BTC that is bartering at around $8k apiece.
Sure, if you're a mining pool that has like 10,000 machines enslaved to Bitcoin mining 24/7/365, that $1k profit gap shouldn't be considered as scraps.
Other mining experts and representatives of major mining pools, agree on the fact that mining will become more difficult and therefore less profitable for startups and small-scale pools. Nonetheless, the few mining giants that will manage to optimize their operations and survive the halving will occupy a larger piece of pie every 4 years.
Maistry, among other industry experts, also agree on the fact that in the long run, mining pools will always be able to make a profit as Bitcoin is expected to be a rarity that costs more as time passes.
What to expect in terms of pricing
On the other side of the fence, financial analysts are debating on the price of Bitcoin post-halving with bullish analystrs such as Kevin Svenson saying that historical patterns indicate that even if undefined, a price pump and most likely a new all-time high is to be expected after the halving.
While Bitcoin didn't always jump to ATHs after each halving, it has always managed to grow anywhere between 100% to 170% within a year after the halving.
While more than 80% of all 21 million Bitcoins have been already mined, it is expected that the last BTC will be mined somewhere in the year 2140 based on Satoshi's algorithm.
Ross Peili is Russian-Greek hi-tech investor and entrepreneur. Studied Digital Economy at UNIC, with Andreas Antonopoulos as a lecturer. Member of the European Blockchain Observatory & Forum, and the European AI Alliance. He is consulting with and advising Blockchain, IoT, and Biotech projects since 2016. Parallel he is a casual author for various fintech media outlets.
Less than half a year is left before the next Bitcoin block reward halving is going to occur, and the […]