Predictions for a post-halving Bitcoin world

In just about a month, the block reward for Bitcoin will be reduced by 50% — from 25 BTC per block to 12.5. While this already happened once before, on November 28, 2012 from 50 BTC to 25, today’s Bitcoin economy is much different than before. As such, this coming halving day could have some some real consequences for the cryptocurrency world.

Why is this time different? First, the adoption of Bitcoin (as well as many altcoins) has proliferated in the past 4 years, making the Bitcoin economy larger in size and scope, and its markets more active & liquid with less price volatility:

2012: mkt cap < $1.5B; daily tx ~35k; mkt price ~$25; exchange volume ~$35,000 per day; unique addresses < 40k; mining difficulty ~500 million; venture capital investment $tens of millions

2016: mkt cap > $9B; daily tx ~250k; mkt price ~$580; exchange volume ~$60,000,000 per day; unique addresses > 400k; mining difficulty ~200 billion; venture capital investment $ nearly a billion.

Second, ASIC mining and the industrialization of the mining process. Not only has the hash rate of the mining network and the difficulty increased by orders of magnitude over the past 4 years, but the miners involved have become more sophisticated and commercialized. In 2012, the mining network was mainly comprised of home miners, sometimes pooled together, mining on their home PC hardware using CPUs or GPU rigs cobbled together. Today, ASIC mining dominates with individual machines capable of many TH/s of power and with energy consumptions of under 0.1 W/GHs (J/GH). This means that miners today operate in competition with one another and produce bitcoins with the intent of selling them on exchanges — generating profit from the difference between their cost of production (i.e. electricity) and the market price. In other words, today’s miners are cost conscious, competitive, and capitalist.

Predictions for after the halving:

1. Bitcoin mining difficulty will take a only small dip, then recover and continue to climb. A 12.5 BTC block reward will render some mining equipment obsolete overnight with bitcoin prices at under $600. These miners will be forced to shut down rather than operate at a daily loss as electricity consumption exceeds the value of daily production. That said, new 16 nm ASIC machines available to the everyday public (such as the Bitmain Antminer S9 at 0.1 J/GH) will continue to be profitable and will come to replace the hashpower taken offline with even more hashpower than before.
2. The price of bitcoin will rise modestly. As those old pieces of hardware are replaced with more energy efficient and powerful machines, the price will gradually rise, perhaps to around $750-$850, but I don’t think we’ll see a sudden price increase to well over $1,000. At current price levels, miners operating at around 0.45 J/GH can still break even, but after the halving you’d need less than 0.24 J/GH to break even (at today’s price and diffculty). An Antminer S7 operating at 0.25 J/GH would need to see a price of $650 to break even, and I believe that the average energy efficiency of the network will only improve as more 16 nm machines come online.
3. The prices of altcoins (especially SHA256 coins) will get absolutely hammered. Altcoin prices (in terms of Altcoin/BTC price) tend to be closely aligned with their relative mining profitability compared to bitcoin. Coinwarz.com is an easy to use resource that will show you relative mining profitability, and the vast majority of times Bitcoin sits at the very top, with altcoin mining becoming more profitable only for short periods. During these short periods, people will point their hardware at mining those altcoins in order to exchange them for bitcoin. The result is that the prices of altcoins tend to always fall as those miners always enter the market as sellers and never as buyers. The moment that Bitcoin halves, mining for nearly every altcoin will be more profitable as miners can effectively produce more bitcoin indirectly by exchanging those altcoins for bitcoins on exchanges. If mining for some altcoin suddenly becomes 200% as profitable as mining bitcoin, you can bet that people will flock to mine that coin and dumping them all on the market (as well as driving up their difficulty). I predict that the market dumping activity will far outpace the increased difficulty costs in those altcoins. In fact, I see many SHA256 altcoins losing 50% or more with the first few weeks of the halving.
4. Bitcoin exchange volumes will increase. With mining becoming less profitable for many smaller miners, those who wish to continue accumulating small amounts of bitcoin on a regular basis will have to turn to exchanges. As such, exchange volumes for bitcoin (and also altcoins due to prediction #3) should see an increase across the board.
5. Ethereum and other smart contract/smart property platforms will gain over colored coin implementations on the Bitcoin blockchain. As the price of Bitcoin increases, and as the number of bitcoins produced each day becomes more scarce, the practice of coloring coins will become less cost effective compared to using smart contracts or smart property on blockchains such as Ethereum. Of course, colored coins only use a very small amount of bitcoin, so this effect may not be as pronounced as the others.

Time will tell if I’m right or wrong, and predicting the future is friggin’ hard — so there’s a very strong probability than I will miss the mark on some or all of these predictions. But, I still wanted to put my intuition out there and see how things pan out in the coming months. I also believe that the market may anticipate the halving, leading some of these predictions to manifest before the block reward is cut.

A.H.