Will Bitcoin Block Reward Halving Prove an Improvement or an Impediment for Bitcoin?
The Bitcoin block reward, currently at 25 bitcoins per block, will be reduced to half that number in early July 2016. This is a very significant event for every bitcoiner, and more so for every miner, because it impacts the price of bitcoin in many ways. More about bitcoin mining can be read here
A number of leading miners have already expressed concerns about the next halving. According to them, the next halving could directly lead to serious long term negative consequences for Bitcoin. One such miner is Chandler Guo, who runs one of the largest bitcoin mining operations in the world as founder and head of Bitbank. BW.com, the mining company run by Guo, owns about 10% of bitcoin mining hashrate, which is a huge share for just one company and individual. According to Guo, the next halving is going to make a lot of hardware too costly to operate.
“If the price doesn’t go up very quickly, up to two times, it means a lot of the older machines will be shut down. They must shut down.”
This follows directly from the fact that all mining hardware consumes electricity to run. If the hardware cannot recoup the minimum cost of electricity, it becomes unprofitable to run. Halving of reward will directly impact profitability, and unless the bitcoin price increases, goes the thinking, the lowered profits will prove unsustainable for many miners. Less efficient hardware will have to be abandoned after the next halving.
According to Guo, “There will be 300 petahash of older machines that will be shut down immediately. They don’t need to work anymore; they just shut down because the price of electricity they consume will be more than the value of bitcoins they generate.”
Guo’s reasoning how bitcoin is looking at dire straits goes like this: if 300 petahash of hash power is removed from the network suddenly, then finding the next block will become harder for everyone. Whereas it takes less than 10 minutes to find the next block as of now, Guo believes that with the reduction of hash power, users will have to get used to transaction times that could be as long as 15-20 minutes, or even more. This, Guo and others believe, will drastically reduce confidence in Bitcoin, and force others to rethink their support of this leading digital currency.
However, there are many other experts and miners who do not think that the upcoming halving of block reward will negatively impact Bitcoin. Bobby Lee is one such miner. As CEO of BTCC, he oversees the third-largest bitcoin mining pool, one that controls about 16% of total hashrate. He believes that there will be some drop in the hashrate after the halving as some hardware is rendered obsolete, but the reduction will not be severe.
Says Bobby Lee: “After mining, the hashrate will definitely come down a bit; it will probably come down by 5-10%. However, it won’t come down by more than 30%. We’ve seen it in other cryptocurrencies that after a block reward halving, the hashrate does come down. That’s expected.”
According to him, people and hardware will adjust to the changes circumstances of halved block reward. He explains it by comparing it with Donald Trump, and how his acceptability has only increased with time, “For people who don’t like Donald Trump, its a huge crisis. However, after a few weeks, they calm down. Similarly, people will adjust to the bitcoin reward halving too.”
“We’ve already had a halving in the past. It does imply lower short-term miner revenue. However, we did not see a significant drop in hashrate when the last halving occured in 2012.”
Ultimately, the crisis of reduced hash rate after block reward halving can be totally averted if the price somehow increases along with the halving. This is seen as the best case scenario by everyone concerned. The recent spike in bitcoin price from $420 to more than $550 is taken by many as a step in that direction.