Between the difficulty of mining and the crazy gamble of Bitcoin miners, and also the health crisis, rivalry between miners is multiplying. The halving that will see the reward per block being halved seems to be pulling up the mining difficulty on the BTC network lately.
The difficulty of mining on Bitcoin has echoed the impact of the recent drop in BTC prices on miners. In order to survive, these network members have begun to compete for network rewards and must be increasingly resourceful in obtaining cheap electricity, but also invest heavily in mining-related infrastructure.
But first, what's a Halving?
Halving Bitcoin is a hot topic and it can be expected to continue to be so until it happens in mid-May 2020. Basically, Halving refers to the event of halving the reward, or remuneration, for mining a cryptocurrency. It is a key event in the system for creating new Bitcoins. On the other hand, mining is a service that consists of verifying transactions or performing calculations to create new copies of a cryptocurrency. This service is paid for. In other words, halving is the programmed halving of the supply of Bitcoins, which occurs every 4 years. Halving? But how does the Bitcoin protocol work?
On the Bitcoin network, every 10 minutes or so, a block is created. Each block contains a number of transactions and is linked to the previous block, thus forming a chain of blocks (blockchain). It is through the mining process that all blocks are generated. To validate a block, all Bitcoin miners compete and try to solve a very complex 'mathematical puzzle'. The miner who succeeds first is rewarded in Bitcoin.
Every four years the supply of Bitcoin is halved, a division called 'halving'. It is these mining companies that receive the Bitcoin created as a reward for their work, which is costly (electricity, equipment), and for validating and securing transactions. They also take commissions on the transactions.
The Bitcoin protocol devised by its inventor, Satoshi Nakamoto, ensures that for every 210,000 blocks, the reward is halved. From the first transaction, the first block of Bitcoin in 2009 until 2012, the reward per block was 50 Bitcoins. On November 28, 2012, the first halving took place, which meant that each miner would only receive 25 Bitcoin from that date on. 210,000 blocks later, on July 9, 2016, a second halving took place, increasing the reward to 12.5 Bitcoins per mined block. The third halving, increasing the reward per block to 6.25 BTC, is predicted to occur in May 2020 when the 630,000th block will be mined.
Difficulties for miners?
It is already known that bitcoin mining is encountering more and more difficulties every year: from the efficiency of electricity to the cost of energy, and from appropriate devices to legislation. Moreover, during halving, miners will receive half as much bitcoin (6.25 as opposed to 12.5 previously) for block validation. As a result, these companies will sell less bitcoin to finance their activity. The profitability of all but the most efficient mining operations will be severely challenged. Many, particularly those without the latest equipment, may even be forced to either upgrade their equipment or shut down their mining operations altogether.
In March, Christopher Bendiksen, head of research at CoinShares on Bloomberg, already made a statement on this difficulty for miners during Bitcoin's 3rd halving in March. He said:
'The price of Bitcoin has to be around $7,400 for the average miner to be profitable. It becomes negative around $4,500. Many are likely to shut down their facilities right away as expectations for a rally continue. If that doesn't happen, many will close down after the halving.'
So can we think that like the previous halving, this third one will be as positive for the price of Bitcoin?
For some, halving would increase its price. Others believe that the impact will be negligible. There is little historical perspective in terms of halving, as Bitcoin has only experienced two halving events to date. But it still seems interesting to note that the price has always risen in the months leading up to the event. Previous halving events are usually followed by a big hype or fanfare that invariably contributes to the price of currency going up. But this time, things may be different. For example, as a result of the last halving in 2016, Bitcoin prices jumped from around $600 to $1,000 in just a few months, and even around $20,000 the following year. Today, many Bitcoiners anticipate a similar trajectory for BTC in the coming months.
Cointelegraph called upon José Llisterri, the co-founder of Interdax, to ask his opinion on the subject. Llisterri explained that:
'16 months after each of the previous events, the value of the Bitcoin-U.S. Dollar pair has tended to approach its highest level in history. If this trend continues, a new record could be reached around or after September 2021. Only the most efficient miners will be able to continue, as the halving will double their operating costs almost overnight. In addition, once the inefficient miners have ceased operations, there may be a favourable adjustment of hardship for the remaining miners, which could lead to improved profit margins. »
From another point of view, for the creator of the Binance exchange platform, the value of Bitcoin is not determined by the cost of production but by demand. The demand for BTC tokens seems to be increasing while the supply is about to decrease. Thus, the price of Bitcoin is expected to increase due to the scarcity of the asset.
What about investors?
According to recent data released by Glassonode, the fact that investors are sending their Bitcoin from the stock exchanges to portfolios indicates a 'potential shift to longer-term conservation strategies'. More specifically, investors are gradually adopting a long-term holding strategy. Indeed, the number of Bitcoins held on the exchanges has been at its lowest level since last June.
The total number of bitcoins stored on crypto-exchanges has dropped to less than 2,200,000 BTC. Glassnode said on twitter that:
Balances are down almost 10% from January highs... Apparently, the new investors are in for the long haul, using Bitcoin as a safe haven while confidence in traditional markets wavers.'
Written by Laetisia Harson, Project Manager at Magna Numeris