One of the most important and revolutionary aspects of Bitcoin is its monetary policy of disinflation with a strict 21 million supply limit. Bitcoin’s model of disinflation involves cutting block rewards in half every 210,000 blocks, or 4 years. These events are affectionately known as “halvenings.”
Bitcoin’s block reward was first set at 50 BTC. Since then there have been two halvenings, leaving current rewards at 12.5 BTC per block. These will completely disappear by the 34th halvening, at which point all 21 million Bitcoin will be in circulation.
Halvenings have historically been times of great price speculation and of concern. With less Bitcoin distributed, the expectation is that demand for it will increase. However, the question of when is critical as the mining ecosystem must also adjust to the reduction in block rewards:
- Are miners able to bear through a 50% cut in profitability if the halvening is priced in a few months after?
- If not, will a significant majority of the hashrate disappear? How will that affect blocktimes?
- Will this lead to a Bitcoin mining death spiral where “Bitcoin prices drop materially, eventually marginally profitable miners shut off, ad infinitum, until all the miners are gone and no one mines Bitcoin”?
Let’s examine Bitcoin’s past two halvenings to answer these questions and see how they have impacted Bitcoin’s hashrate security.
The First Halvening
The first halvening occurred on November 28, 2012. We see a small uptick in price after the block rewards were reduced from 50 BTC to 25 BTC. However, the price wasn’t significantly affected until March 2013.
When we look at Bitcoin’s hashrate, we see slow and steady growth for most of the year until the Halvening. This can be attributed to the fact that no significant technological improvement in mining hardware came onto Bitcoin’s network to drastically affect the hashrate.
FPGAs, which outperformed CPUs and GPUs, were introduced in 2011. These became popularized through most of 2012 as they required 3 times less energy than GPUs. The next time new, more efficient, mining hardware was introduced and significantly affected Bitcoin’s hashrate were ASICs. However, these weren’t announced until mid-2012 and the first one that was publicly shipped to Jeff Garzik wasn’t until January 2013.
But when the halvening occurred in December, the linear uptrend was interrupted and took a significant dip (~35% from ATH to mid-December). Fortunately, Bitcoin’s blocktimes were not significantly affected.
Now let’s take a look at Bitcoin’s mining profitability in light of the halvening in 2012.
Again, we see a sharp dip in profitability at the same time as the halvening. Block rewards dropped from a cumulative total of $600 (50 BTC x $12) to $325 (25 BTC x $13). Therefore, we can conclude that the sharp decline in profitability due to the halvening pushed miners out of the ecosystem, decreasing Bitcoin’s hashrate by approximately 35%. Now let’s take a look at the second halvening to see if we can find any parallels.
The Second Halvening
The second halvening occured on July 9, 2016. The price actually dips this time around and doesn’t start climbing until five months later in December.
Here we see that Bitcoin’s hashrate dips slightly, levels out, and then grows to break 2E in late October. This time, the dip in hashrate is ~23% if we measure from the all-time high and all-time low in July. However, it is well within the average range of fluctuations that Bitcoin has seen throughout 2018. Therefore the only noticeable effect the second halvening was temporarily stalling the uptrend in hashrate.
Once again, mining profitability decreased significantly as block rewards with a cumulative total of $17,000 (25 BTC x $680) dropped to $8,562.5 (12.5 BTC x $685). But why wasn’t the hashrate significantly affected like last time?
One reason is that miners were also able to purchase ASIC’s before the halvening when profitability was greater. For example, Bitmain’s Antminer S9 was available for purchase in June and were delivered shortly thereafter. The delayed 14NM Asic Miners from BW were also delivered in July. Having these more powerful and energy efficient rigs helped sustain the hashrate post-halvening as other miners dropped out due to the lack of profitability.
Another reason could possibly be that miners were willing to mine through lower margins, or even at a loss, because they believed that the price of Bitcoin would increase significantly in the future. In fact, this is behavior we’ve seen in the past year during the bear market of 2018:
Despite that fact that profitability plummeted and continued to decrease, Bitcoin’s hashrate increased through September. This is most likely due to miners utilizing their profit during the bull of 2017 to buy more mining hardware or to cover expenses during times of less profitability. And even though there was nearly a 50% drop in hashrate from November to December, blocktimes were not significantly affected as the hashrate declined gradually:
After examining both halvenings, we can conclude the following:
- Bitcoin’s price is not immediately affected.
- Mining profitability is reduced significantly.
- Miner drop out is to be expected in light of this.
- Blocktime fluctuation is minimal as difficulty readjusts.
- An immediate drop of 35% in hashrate did not result in a mining death spiral.
- A 50% drop over a month period did not result in a mining death spiral.
- Hashrate can be sustained and even grow through the introduction of new mining hardware, reinvestment of funds earned during times of high profitability, and a willingness to mine at a loss in the hopes that the price will grow in the future.
One of my motivations for examining the halvenings was to collect data on how Bitcoin could adjust to a post-block reward era. Understanding the effects of Bitcoin’s controlled supply will help us gain insight as to how the ecosystem will adjust in the future. Though not comprehensive, I’ve provided a few thoughts to help push the conversation along:
- In a post-block reward era, Bitcoin will rely on fees to pay miners for its network security.
- As block rewards get smaller, the halvening schedule of approximately every 4 years will allow time for the fee market to develop and hashrate to stabilize around fee discovery.
- Reduced block rewards will also make the financial impact of the halvenings insignificant to miners. For example, a drop of block rewards from 596 satoshis to 298 satoshis won’t be that large even if a single Bitcoin is worth $1 MM.
- There is historical precedence of transaction fees becoming comparable to block rewards. From 12/21/17–12/24/17, Bitcoin consistently had 8–11 BTC in fees or $128,000–$176,000 per block. There was even one block that had more in transaction fees than block rewards.
- Moores law has been slowing down significantly. Barring new methods to offset chip development, new efficient mining hardware will not help mitigate against times of low profitability. Therefore the stability and growth of the hashrate and blocktimes will be subject to the money management of miners. This includes the pursuit and development of cheaper sources of energy.
The next halvening is estimated to be mid-2020. You can keep track of it here:
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