The halving means that the reward the miners receive for finding a block is halved. Bitcoin Cash (BCH) is expected to be ready within the next 24 hours. Bitcoin SV (BSV) will follow suit a few days later, while Bitcoin itself (BTC) will follow in more than a month. We explain the event, both technically and economically – and why it can have very unpleasant consequences for Bitcoin Cash and Bitcoin SV.
Of course, Bitcoin is a fascinating payment system. Faster than a bank transfer, cannot be censored, and flows directly from the sender to the recipient. But to be honest, even today, in 2020, the focus will be less as a means of payment than as an investment. And this function is based above all on a mathematical equation through which Satoshi defined the distribution of new monetary units.
The essence of this equation is halving. Since it is imminent at Bitcoin Cash (BCH), will take place at Bitcoin SV (BSV) in the coming days, and will also occur at Bitcoin in a good month, we will explain it here both technically and economically. You will also learn why Bitcoin Cash is so much earlier than Bitcoin and why halving can have very dangerous consequences for both BCH and BSV.
The technology of halving
For those who are new to the concept: a miner finds a new block every ten minutes. If he succeeds in this, he can credit himself a certain amount of bitcoins that did not exist before. He is creating money right now, and that’s the only way new bitcoins can be created. The funding rate of bitcoins is precisely defined by a code that Satoshi has specified. In the beginning, the miners received 50 bitcoins per block. However, this amount is halved every 210,000 blocks.
210,000 blocks: that’s 2.1 million minutes, 35,000 hours, 1458.3 days or 3.995 years. Because the time between blocks is not always exactly 10 minutes – the miners work a little faster when prices rise – the first halving took place in November 2012, a little less than four years after the Genesis block, and the second Halving already in summer 2016, which means Bitcoin was half a year ahead of the actual rhythm. The miners currently receive 12.5 bitcoins per block. But in mid-May – probably on May 14th – the reward will halve again and drop to 6.25 bitcoins.
For most investors, technology is secondary. They are concerned with the economy. And there should be few technical properties of Bitcoin that have such far-reaching economic consequences.
Satoshi has opted for a declining rate of creation of new bitcoins, somewhat reminiscent of a gold mine that will wear out over time. He never specified why he did this, which is why it is speculated that Satoshi was simply a friend of hard money. But there are also ecological reasons, since the total electricity consumption of the mining is significantly lower if a large part of the bitcoins are generated as long as they are still much less valuable. Such discussions in connection with Wei Dai’s b-money took place long before Bitcoin.
The key effect is likely to be that Bitcoin will inevitably become the least inflationary money in the world at this rate. The inflation rate halves every four years. If there were about 18.310 million bitcoins at that moment, the current inflation rate would be about 3.6 percent. This is already lower than many fiat currencies, but overall higher than the central banks usually aim for. With the next halving, the inflation rate will drop to 1.8 percent, which will be less than the European Central Bank is aiming for the euro. And in four years, it will drop to less than one percent, and so on.
The halving gives investors a reliable and inevitable forecast of Bitcoin’s inflation rate. One does not have to assume that the world’s euros and dollars will sink into hyperinflation. Perhaps the idea that central bank independence will achieve monetary stability works. But there is always a risk and uncertainty. With Bitcoin, on the other hand, inflation rates are already certain.
Like an oil price shock?
But how does the halving work in the short term? What can you expect when this event occurs? An analogy would be the oil price shock. In 1973, the Organization of the Arab Oil Exporting States (OAPEC) cut oil production by five percent to put pressure on the West, which supported Israel in the Yom Kippur war. The oil price jumped around 70 percent and quadrupled the following year.
Do Bitcoin halvings have similar effects on price? If the miners mine fewer bitcoins, fewer bitcoins will open on the exchanges. The supply is becoming scarce, and if demand remains the same, the most obvious effect is likely to be that prices will rise. This has been confirmed in the past: before the first halving, the Bitcoin price was around $ 10, and over the following year – 2013 – it rose to $ 260, then to more than $ 1,000. Similar to the second halving in the summer of 2016: the price was previously around $ 300 and over the following year it jumped to over $ 10,000.
In 1973, OAPEC reduced the production volume by only 5 percent. The Halvings cut the production of bitcoins by 50 percent. Accordingly, the consequences for the price are much more radical. The price of petroleum has increased about four to five times over the course of a year. At Bitcoin, it has so far increased more than 30 times. However, while the first oil price shock came as a surprise and caught the market by surprise, the halvings at Bitcoin are perfectly predictable. Therefore, almost no effects were discernible in the short term. Neither the first nor the second halving had an immediate impact on the price. He then stays where he was before. In the medium term – over the course of one to two years – the effects were all the more tremendous.
Will this repeat itself on the third halving? Some speak for it, some speak against it. This suggests that fewer bitcoins will actually flow to the markets from mining, and that this will reduce selling pressure. Given a constant ratio of supply and demand, this should inevitably lead to an increase in prices. And there is currently no evidence that the demand for bitcoins is falling.
However, there is an argument against it that the role the newly mined coins play in the game of supply and demand decreases with each halving. When the rate of creation halved in 2016, 12.5 fewer bitcoins poured onto the market every ten minutes; with the upcoming halving, this will only be 6.25 Bitcoin. At the same time, the number of existing bitcoins has increased by 2,628,000 coins since then, which will also reduce the effect of the halvings.
This enhances the influence of other factors: Will the demand for bitcoins continue to increase – or will it stagnate – or even decrease? How many bitcoins stream into the markets from other sources? The PlusToken fraudsters have allegedly taken 200,000 bitcoins and have only sold part of them so far. After the next halving, this number will correspond to more than 200 days of mining. And that’s just an example.
Why the halving at BCH and BSV takes place earlier
Halving is imminent at Bitcoin Cash. At this moment, BCH is at block 629,842. 158 blocks left, then it will have reached block 630,000. Then the miner’s reward will be cut in half. This corresponds to just over a day. Bitcoin SV, on the other hand, still lacks almost 400 blocks, which corresponds to almost three days.
Why are the two forks so much earlier than Bitcoin, which is only at block 624,816, i.e. has to process more than 5,000 blocks before the reward halves? The reason lies in the algorithm that regulates the difficulty of the mining. To fully explain this, we have to go back a bit. To find a block, the miners have to solve hash puzzles. The more computing power they invest in it, the faster they solve the hash puzzles. In itself, this would mean that the faster blocks are found, the more computing power the miners use. To prevent the Bitcoin mine from being depleted in the shortest possible time, Satoshi has implemented an algorithm that adjusts the difficulty of the puzzles every 2016 blocks so that the 10-minute interval between the blocks is restored.
When Bitcoin Cash forked from Bitcoin, this became a problem. The long period until the difficulty was adjusted made the blockchain vulnerable. The hash power that the miners use is derived from the price. If a Bitcoin is worth $ 10,000, but a Bitcoin Cash is only 1,000 – the prices are only an example – the BCH miners invest only a tenth as much as the BTC miners. It is logical. Accordingly, it would take 10 times as long for the difficulty to adapt – if it does at all, since it is not worth mining at all at a lower price and the same difficulty. If it does happen, Bitcoin Cash Mining will suddenly become very profitable. The miners flock to the chain, creating blocks in no time in 2016 and then, after adjusting the difficulty, to switch back to Bitcoin. The blockchain fluctuates between long epochs of the ice age and short episodes of overheating.
To prevent this, Bitcoin Cash has changed the difficulty adjustment algorithm. Instead of all 2016 blocks, it adapts to all six blocks. This smooth adjustment prevents the bipolar alternating bath between slow motion and fast motion – but does not completely eliminate the effects mentioned. The new algorithm can and will continue to be used by the miners. There are still short episodes in which blocks follow each other very quickly, and periods in which blocks take a very long time. The hashrate is much less steady – and there is apparently an imbalance that tends to result in slightly more blocks being generated than with Bitcoin.
Bitcoin SV shares this algorithm. The consequences here are minimally less drastic. This could be due to the fact that Bitcoin SV consumes less hashrates – and may therefore be less subject to fluctuations – or that the miners at BSV tend to be “more loyal” than at BCH: They switch less quickly between the blockchains, but consider it their job to stabilize the blockchain.
The consequences of halving at BCH and BSV
A short-term effect on prices through halving would be rather surprising with all bitcoins. After block 630,000, the price will probably not be much different than after block 629,999. This means that the miners’ income will halve.
It is particularly dramatic that the income of the miners at Bitcoin (BTC) will remain constant for at least a month. This should further reduce the share of SHA-256 hashrates – these are the miners of BTC, BCH and BSV – in Bitcoin Cash and Bitcoin SV. Already today, the two blockchains each represent only 1.5 to 3 percent of the total hashrate, while more than 95 percent usually remains focused on Bitcoin. After the halving, this imbalance is likely to worsen.
This makes the two blockchains vulnerable. An ever-smaller part of Bitcoin’s hashrate, if it feels like it, can drive 51 percent attacks on BCH or BSV and wreak havoc in other ways. The security of the two blockchains is based on the benevolence of the BTC miners – or rather, on their reluctance to do something illegal with their mining equipment. At the moment, it is still too risky for miners to engage in illegal attacks, while the absolute majority of the machines are busy drilling on the BTC blockchain.
The situation will only really get serious if the miner’s reward is halved at BTC. Again, it is not to be expected that this will have a direct impact on the price. Therefore, the income for the more than 95 percent of the miners who do not mine BCH or BSV will also be halved. This will bring many to the brink of profitability – and probably push them above it. Apart from profitability, ruin and despair lurk. Both should significantly increase the incentives for miners to do something illegal. If you have a choice of scrapping the mining equipment or driving a 51 percent attack on Bitcoin Cash, how do you choose? And if a miner decides to scrap it – then it should be easy for an attacker to buy mining machines in bulk,
Therefore, the upcoming halvings of Bitcoin Cash and Bitcoin SV should not be a reason to cheer. Rather, skepticism is appropriate, and, for fans of these currencies, also a fear of whether the blockchains will become victims of attacks in the coming months. And maybe the reason behind the recent surge in Bitcoin hash rates, are Bitcoin Cash miners turning their machiner to mine BTC earlier before the BCH halving happens.
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