The halving: what to expect?

Monday 07 December 2015

Bitcoin supply will drop in 2016. What can we expect as a result?

One of bitcoin’s most characteristic and attractive features is its limited supply. Miners create new bitcoins by carrying out trillions of simple but repetitive calculations: a ‘proof of work’ that ensures the blockchain cannot be altered without unimaginably and impracticably vast processing power. As a reward for securing bitcoin’s ledger, they receive new blocks of coins, with one being generated every 10 minutes.

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OrangeMiners' rewards will be cut in half next summer

During bitcoin’s early stages, the block reward was 50 coins. This was the ‘bootstrap’ phase, a highly inflationary period in bitcoin’s history. For much of this time, it was possible to CPU-mine coins.

From block 210,000 (November 2012), the block reward halved to 25 coins. Next year, it will halve again. From block 420,000 the reward will drop to 12.5 coins. And so it goes, every 210,000 blocks, or just under 4 years. You can find a countdown to the next halving at Bitcoin Clock. At the current estimate, block rewards will halve in July 2016.

Ok. So what?

Is this significant? Yes, for a number of reasons.

The most obvious is that anyone involved in mining is probably going to see a reduction in their income. All things being equal, rewards will be cut in half. This will likely result in many miners simply switching off their rigs; only the most efficient will be able to turn a profit, leading to even greater centralisation of the mining infrastructure.

However, offsetting this is the drop in supply. At present, 3,600 bitcoins are mined every day. Many are sold to pay for electricity and other costs. That is a constant downward pressure on the price of bitcoin. So it’s reasonable to assume that if rewards halve, price will rise.

Nothing is ever quite that simple, of course. Ask around and you’ll find some people who expect a significant bump in bitcoin price come next summer. Others will claim it’s already priced in. Unfortunately, the mining landscape has changed so vastly since the last halving that we can’t take it as any indication of what might happen this time. A look at the Difficulty chart shows that there was no appreciable change back in November 2012, but since then there has been a rapid increase in mining technology with the advent of ASICs. It costs more to mine, now.

Merchants, beware volatility

For merchants and those using bitcoin as a transactional currency, there will probably be no discernible change. However, it will be worth looking ahead a little if you hold bitcoins (rather than converting to fiat straight away), because one way or another we can expect some volatility in price around the halving. Speculators are always going to speculate, and if there’s one thing the last few weeks has taught us it’s that traders have the effect of exaggerating movements in the markets that are caused by other factors. ‘Buy the rumour, sell the news’ is likely to be the case. That’s something you might want to hedge against.

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