Aftermath on Bitcoin’s halving
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Intro
On May 11, Bitcoin underwent the process of halving. The 630,000th bitcoin block was mined, and the miner who created it got a reward of 6.25 bitcoin, rather than 12.5, as has been the case for the past four years. That signifies a reduction from roughly 1,800 BTC down to 900 BTC per day.
This marked the third halving since the currency was launched in 2009. Various stakeholders, including miners, users and investors had different expectations for the event: some bullish, some bearish, some expecting zero changes, others worried the network would enter a death spiral. We wanted to dig into that and understand what really happened and what it means for the future of Bitcoin.
Bitcoin Halving
Bitcoin is a cryptocurrency that is programmatically designed to be scarce. There will only ever be 21 million bitcoins produced, and these are introduced to the bitcoin supply at a fixed rate of one block every ten minutes. The network dynamically adjusts the production difficulty for the miner if they’re going too fast.
In addition to that, the block reward that miners receive halves every four years or so. After 36 halvings, the reward will be less than 1 satoshi, which is 1/100 millionth of a Bitcoin. 1 satoshi is worth 1/10,000th of a cent at current bitcoin prices. Anything less than 1 satoshi is worthless in bitcoin. The halving will continue after 140 years, but will yield no block subsidies. Even if one bitcoin is worth $100 million, 1 satoshi will only be worth $1.
These events are designed to squeeze out inefficient miners and shift all their rewards to the transactions fees in the long-term as Bitcoin matures.
Previous Events
The first halving happened on November 28, 2012. Following the completion of the block 210,000, the mining reward halved from 50 to 25 BTC. The event catalysed a rally for bitcoin from about $10 to $1,160 in just 12 months. The first Bitcoin halving was a big deal, discussed for months in advance.
The second halving, on July 9, 2016, followed the completion of the block 420,000. The price jumped more than 300%, from $650 to $2,800, within the same time span.
Both of these events were celebrated, with early Bitcoin supporters suggesting gatherings in bars and restaurants around the world to commemorate the moment.
Expectations
Based on previous experience, a lot of people hoped bitcoin rates would jump again, even though it might be difficult to untie those previous halving events from other factors affecting the price.
Miners
Miners are the party most affected by the halving. They are the core to the network, as they take the transactions from the pool and put them into new blocks. For that they receive the pre-set block reward and fees attached to each transaction.
The fees are defined by the market equilibrium. Miners are incentivized to process the most expensive transactions first. If the user underpays, the transaction might be pending for hours or even days. In the long term, the block reward would turn to zero and miners will only make money on fees.
After the halving, miners would get less in rewards, which would squeeze their margins further. There have been concerns as to whether smaller operations that sport inefficient gear or have raised debt loads are likely to be swept out. Some experts argued that the revenue decline might be balanced by the growing price of BTC as happened in previous halving events. However, if the price drops, less efficient miners will be squeezed out faster.
Chun Wang, co-founder and managing partner of F2Pool, said: “Often, larger farms have better economies of scale and therefore are able to survive reductions in the mining reward or price volatility.”
Users
As miners have to support their margins, some have had to charge higher fees in order to justify their costs. That means more expensive transactions making Bitcoin a less efficient value transaction instrument.
If less miners are able to operate then the network becomes more centralized under a small number of pools. This is a negative development in the long term, as it makes bitcoin closer to a centralized currency.
Investors
Cryptocurrency traders were anticipating significant unpredictability in bitcoin’s price for the short term. The very anticipation of the halving has likely contributed to outperformance by bitcoin over the last few weeks leading up to the event. Also, for the first time there was a derivatives market for bitcoin in both futures and options. In previous halvings, market participants could only express their predictions via the spot market. With a derivatives market it became possible to hedge and lock in future bitcoin prices in order to cover expenses without actually selling it — which was likely to decrease the effect of selling pressure from miners on bitcoin prices.
Reality
The halving took place on May 11.
- About a third of Bitcoin mining firms may already be switching off their machines as the business becomes unprofitable due to a reduction in mining rewards.
- Bitcoin has gained 11% since the adjustment and briefly reached $10,200. Overall, though, the gains have been nowhere near what traders were hoping for.
- According to Alejandro De La Torre, VP at mining pool Poolin, miners who make between 15% and 30% of the entire BTC network hashrate are already in the process of shutting down as profit margins come under pressure. On the day of the halving, Bitcoin’s hashrate hit 138 exahashes per second — the highest it’s ever been. We saw a significant drop in the available hash rate of the network afterwards. While it started recovering around the end of May, it still hasn’t reached its previous highs.
- Ahead of the Bitcoin halving, Bitcoin’s price was at around $10,000, fully recovered from the coronavirus crash. This allowed older miners to stay in business for longer but that’s no longer possible.
- The companies operating on older generation mining equipment, such as Bitmain’s S9 miner, have become largely unprofitable especially on higher electricity costs. At bitcoin’s price of $9,776 and using the latest Antminer S19 Pro, a single miner paying the U.S. average electricity price of $0.13 per kWH could expect a profit of $0.97 a day.
- There aren’t a lot of publicly traded mining firms that would be obligated to share their financials, but Argo, a mining firm listed on the London Stock Exchange, reported a dip in May revenue linked to the halving event. The firm operates 18,000 mining rigs and says it was only able to overcome a further revenue decline by upgrading its equipment. According to its operational update, monthly mining margins were 34% in May, down from 39% in April.
- Transaction fees have become a larger proportion of the remaining miners’ profits and the fees themselves have grown almost tenfold for a few weeks after the halving, but returned to almost their usual levels as more miners returned to the network. The average Bitcoin transaction fee rose from $2.52 to $6.65 from May 11 to May 21. Miners earned 44% more in transaction fees in the nine days since the halving than they did for all of April. Transaction costs had already been rising two weeks prior to the event, spiking 400%.
- The Bitcoin network has already undergone its first difficulty adjustment to compensate for the falling hash rate. It’s a self-regulating mechanism that occurs every 2016 blocks and is designed to keep mining speed at approximately 10 minutes per block. This time the difficulty was decreased by 6%. Negative adjustments happen infrequently. According to CoinDesk’s Zack Voell, there have only been 49 in the protocol’s history.
Future
Investors who were expecting a sudden surge in the price of bitcoin after the technical adjustment three weeks ago that reduced the rate at which new coins are generated may have to wait a few months, or perhaps a few years, according to some analyses.
Network participants now pay higher fees to compensate for slower block production time post-halving. It still takes time to stabilize miner revenue from fees to reflect the healthy growth of the Bitcoin network. We are likely to see a number of negative difficulty adjustments that would incentivize more miners to get back on the network.
Earlier this year, both MicroBT and Bitmain unveiled their new mining rigs, which are rated at around 110 terahashes per second. More miners will likely upgrade too.
The most important part is that the worst predictions haven’t materialized. The network didn’t go into a death spiral or become centralized and most of the key parameters have returned to viable values. We’ll be seeing more halving events in the future and at this point it’s safe to expect Bitcoin won’t be shattered by them. At the same time. we don’t think halving will have a significant impact on the price itself. In two previous events, the further growth was likely caused by the outside factors.
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