The upcoming Bitcoin halving may result in greater demand and higher prices, but what are the challenges for the 2020 halving?
Sometimes less is more. That’s a tenet of modern design, but it’s also a central belief of many in the decentralized cryptocurrency community. Throughout the Bitcoin world - in Twitter threads, on crypto news websites and in private Telegram and Discord channels - conversation almost invariably turns to one topic: the May halving that will reduce the amount of newly minted Bitcoin by 50%. Less Bitcoin being produced may mean greater demand and higher prices, but to understand just why the community at large is thrilled we need to take a look at Bitcoin’s history.
Bitcoin was intended as a finite and increasingly scarce commodity. Miners need to solve “block” calculations to earn the right to mint the next swathe of Bitcoin. Just as a gold mine grows gradually less efficient as the veins are tapped and the lodes uncovered, Bitcoin mining also grows more difficult over time. The calculations miners must solve grow more difficult, and the rewards grow smaller. When its pseudonymous developer Satoshi Nakamoto launched the Bitcoin network in 2009, any off-the-shelf computer could mine and run a decent chance of winning the 50 BTC block reward. This has lessened over time. In 2020, the individual block reward is 12.5 BTC, and only custom-built and energy-intensive mining rigs have any chance of earning the reward. Bitcoin has halved twice before: in 2012 and in 2016. When the 2020 halving occurs, the reward for successfully mining a block will be 6.25 BTC.
The last halving in 2016 led to major increases in Bitcoin’s price, but not everyone is sure that the 2020 halving will inspire similar market adjustments. When the first halving took place in November 2012, Bitcoin was a lesser known asset class. Few people outside the programming, technology and cryptography worlds had ever heard of it. The May halving will be very different. While cryptocurrency may not be widely understood by the general public, it’s now widely acknowledged and covered by journalists and reporters the world over. The news of the halving, even if its exact significance might remain unclear to casual observers, has the potential to draw new people into the world of cryptocurrency and blockchain.
While the halving may persuade some users to take the plunge, others in the Bitcoin world may find that the new rules — the 6.25 BTC reward — don’t suit them. Miners may see the price of Bitcoin appreciate, which is something they’re likely to welcome, but there are doubts about whether the theoretical increase in price can match the expected doubling in mining costs. In particular, for miners that run higher electricity costs and those running outdated mining equipment such as the Antminer S9, the mining break-even costs could reach as high as $7,600 to $13,000. These higher break-even costs could force a large amount of miners out of the network but may be good news and provide a larger market share for those that are able to remain.
While new miners may be faster and more efficient, driving mining firms to invest in new devices, such as mining rigs, will actually add additional costs, as new mining rigs are expensive and scarce. And that scarcity may not be intentional — there are concerns that coronavirus could break the mining rig supply chain. Though new miners will eventually make their way to mining firms, a delay could lead miners to drastic decisions. Some might temporarily shut down their operations, potentially causing a decrease in the amount of hash power required to solve the mining equations. Halvings are hard enough to prepare for without the complication of a pandemic; the coronavirus may make the forthcoming event even more tumultuous than usual.
Even those in the crypto community who do not hold Bitcoin find themselves involved in debates about the effects of a halving event on price. Some maintain that the certain and inevitable knowledge of an event is priced into Bitcoin’s value, and that the market has already considered the drop in block rewards. This means the price already reflects the looming scarcity. Others take an opposite position: Because the cryptocurrency market is young and still maturing, there can be few hopes of forward pricing. While the argument is of theoretical interest to observers, to people and institutions with holdings it’s vital to take a position. Arbitrage and positioning opportunities may exist, but making the wrong prediction could prove exceedingly costly.
As Bitcoin grows ever more scarce, especially if this growing scarcity creates a price increase, security grows ever more important for people looking to hold or to transact. New users should follow the standard rules for cryptocurrency security, and they should remember that lost codes or keys mean lost currency. A wallet service could be a valuable safety mechanism for new and experienced users alike, and people who acquire larger portions of cryptocurrency may want to split their holdings between multiple wallet addresses.
The next halving will take place on May 12, the exact impact of which — immediate or long-term — cannot be accurately predicted, even after considering the examples of the last two halvings. What is known is that the 2020 halving will impact the Bitcoin community’s future in some shape or form. It may make things — briefly — harder for miners, and it’s liable to bring in hundreds or thousands of new crypto investors. Anyone even tangentially connected with Bitcoin should be prepared for May. Whatever comes, it’s going to be big, and it’s going to be surprising.