Halving: How far will the Sliced-Dominoes fall?

A lot is being speculated about the price and market consequences of the imminent Bitcoin Halving. Would it affect mining efficiency, network fundamentals, activity and models too?

It’s like an eclipse. It occurs every few years and shakes up the way things align. Shadows are cast, lifted and even though everyone is back to their orbits, as usual, something of that usualness tumbles about in the next world-order.

And it’s not a new phenomenon. The way Satoshi designed it, ensures that a Bitcoin miner’s reward is halved every 210,000 blocks. It has happened in 2012 and 2016. This ‘halving’ is expected again in May 2020 – this time, presumably, from 12.5 to 6.25 Bitcoins (BTC) for every block added to the blockchain.

It has been noted that miner revenue gets a big setback with every halving (as much as 50 per cent as reckoned in some estimates). This matters a lot when block rewards can constitute above 90 per cent of mining revenues.

Miners, after all, are the ones who compete to create a cryptographic signature which proves the validity of the transaction and they are the ones who commit it to history on the blockchain. Being rewarded for the work of creating the signature gives them a fixed quantity of Bitcoin. It is this amount that halves approximately every four years.

Comb through a report by Jered Masters from Curtin University, it was noted that the price of Bitcoin could decrease in the short-term and increase in the medium-term. However, the likelihood would not be to the same extent which previous Halvings have seen.

Of course, since miners are quintessential to confirming transactions and creating blocks, what affects them, affects the price and market game in spirals. But for now, let us not carried away on those tangents. Let’s stay with the original orbit. What actually will change for miners henceforth? And how much?

The Better Halved

A report from Grayscale explains how ‘Halving’ has been programmed into the protocol since inception, the report argued, adding that it ensures the transparent and fair distribution of bitcoins through open competition over time. It also incentivizes miners to validate transactions. This helps in pumping up the computational capacity that secures Bitcoin’s distributed financial network. Halving also helps to inject the economic principle of scarcity for the network’s exclusively native currency. This reinforces invest-ability. The report, which used a proprietary factor model to measure the Bitcoin network’s health based on various activity metrics, shows that improving fundamentals have generally been the trend, though temporary declines are typical.

Johnson Xu, the Senior analyst at TokenInsight, spells out the areas we should actually be looking for when we are sussing out halving. He feels that miners are interested to understand what will be the next turn for Bitcoin after its 3rd halving, the price impact, what are some profitable strategies, which ASICs (Application-Specific Integrated Circuits) can be used for mining after the 3rd halving, some miners are also searching for some alternative coins (Altcoins) to mine.”

It was observed in the Grayscale report that – After taking a brief dip in the first half of 2018, Bitcoin network activity stabilized and begun to show modest increases over the last few months. What is interesting here is that in the twelve-to-eighteen-month periods preceding the past two Bitcoin halvings, a similar decline and subsequent rise has emerged.

Bring that Energy Tape

Would May be a significant event for areas like energy usage and network also? Xu opines that as mining reward will be halved from 12.5 BTC to 6.25 BTC, the next-generation mining ASICs (Application-Specific Integrated Circuits) will be more energy efficient. “Change in the network hash-rate after the 3rd halving is also a point of interest in the industry.”

As to the impact on block mathematics, speed, scalability due to the halving – well do not expect any big turning points. Xu does not see any major impact here.
Numbers from some analysis by SEBA Research have pointed that immediately after the first two halvings, miner revenue dropped, albeit no impact on hash-rate (that indicates mining activity and confidence in the landscape) was seen. Even as to pricing, the effect was positive in the first halving and neutral in the second one.

The Smaller Snowball Rolls

Chances are that boys would be separated from men this time. Zac Cheah, CEO, Pundi X argues that since the miner’s block reward would be cut in half, the miners will try to lower their costs to deliver the result. Inefficient miners will be eliminated through competition.

“We expect that it will take longer for a new bitcoin to enter the circulation. The supply will be less. Users need to pay more to make the transaction successful as the miner will need more revenue to cover their costs. If the demand is higher than the supply, it will push up the price, theoretically. If demand is not higher, the inefficient miners will be forced to get out of the market.”

As per Xu’s lens, there are going to be some repercussions that this halving will shape – beyond the immediate ones. Look out for stronger community interest, maturity and new segments.

“We now have a significantly greater number of communities in the industry compared to the previous two halvings; with an increasing number of people getting to know cryptocurrency, Bitcoin, Blockchain concept every day. The cryptocurrency financial market is also maturing with financial instruments such as derivatives creating multiple ways for investors to trade the market, on the other hand, there were very limited derivatives instruments available during the previous two halvings.”

He is also noticing the beginning of the institutional interest next. “We are seeing the beginning of the institutional interest in the cryptocurrency market, with many traditional funds managers, large institutions entering the market in 2019.”

If we go by Cheah’s gut-feel, the past events cannot represent what the future will be. “It depends on the market. Bitcoin is the most used crypto in the world and in demand.”

In a few weeks, the industry would know if this would be just another day in the calendar or the making of a really consequential syzygy for miners, energy critics and new communities. May-Day, then!