Bitcoin Halving, Explained

A guide to Bitcoin halving — a pre-scheduled event that will reduce the asset’s supply, potentially driving the price upward.

Will the Bitcoin price change?

Historically, the price has gone up following a halving, but it ultimately depends on the supply/demand ratio.

Essentially, Bitcoin halving cuts down the supply of BTC, making the asset more scarce. If the demand is there, the price is likely to increase. There are also some historical precedents. On Nov. 28, 2012, the day of Bitcoin’s first halving, the cpryptocurrency’s price rose from $11 to $12, and continued to climb up throughout the next year, reaching $1038 on Nov. 28, 2013.

Roughly four years later, a month before the second halving, Bitcoin’s price started to follow a similar, bullish pattern. It surged from $576 on June 9 to $650 on July 9, 2016 — the day the block’s reward was reduced by half for the second time in the asset’s history. Again, BTC continued to accelerate through the next year, albeit with occasional turbulence, and traded at $2526 on 9 July 2017.

Will it be the same next time? Skeptics believe that the halving has already been priced in (remember this year’s epic, but short-lived systematic price increase?). Although, there is no scientific way to verify this. 

Moreover, the industry has drastically changed over the last four years, as cryptocurrencies — and Bitcoin in particular — became an essential part of mainstream news coverage. Still, some people might be tempted to take the chance, especially given the previous patterns exhibited around Bitcoin halvings. 

Consequently, if history repeats itself and the Bitcoin price starts going up in April 2020, even more traders might start buying the asset out of a fear of missing out, thus stimulating the demand, and, ultimately, the price.

Will Bitcoin miners still be interested?

Some smaller players might be forced to leave (or at the very least, upgrade their hardware).

At this point, the majority of Bitcoin mining is performed by giants like Bitmain, the China-based company that was worth $12 billion at some point in 2018. Bitmain validates blocks with thousands of loud, extremely powerful and high-energy-consuming machines called application-specific integrated circuit miners, which are much more efficient compared to the basic setups used by students or other individuals.

Related: Hydro Mining, Explained

As the block reward becomes less significant, mining rigs that are barely covering production costs will be forced to quit the market. There will still be firms willing to mine Bitcoin at the reduced rate, but the market might become less decentralized as a result (i.e., the pie will be cut into fewer pieces). Still, new and more efficient ways to mine BTC could emerge, potentially enabling smaller businesses to partake.

When will the next Bitcoin halving take place?

The week commencing 18 May, 2020, based on current performance, but it might be 14 May.

The date is not 100% certain at this point because the time taken to generate new blocks may speed up or slow down. On average, the network produces one block every ten minutes. 

The very last halving is expected to occur some time in the year 2140 as the 21-millionth BTC is mined. Once that happens, miners will stop receiving block rewards, but will keep the remaining source of revenue — fees paid by the transactions, which they also collect.

How much Bitcoin will miners receive after the next halving?

Every new block will produce 6.25 BTC. At inception, the reward was eight times as much.

When Bitcoin was launched in 2009, miners were receiving 50 BTC per block. Thus, a total of 10,500,000 BTC was generated before the next halving took place in November 2012, when miners began to receive 25 BTC for each block.

It may seem like an overly generous bonus (more than $365,000 per block, based on current value), but the network was only just starting to develop at the time, and no one knew for certain whether people would continue to find the concept worthy of investing their computer processing power into the Bitcoin blockchain to keep it alive.

Related: What Powers China’s Crypto Mining Industry, and Is It Sustainable?

Another fact to take into account is that the all-time high market price for that period was $31 per BTC in June 2011, but that “bubble” later burst and Bitcoin was back to $2 before the year’s end. Nevertheless, mining has ultimately turned out to be much more profitable for those who got in early, which is a big part of the reason Bitcoin critics call it a Ponzi scheme. 

The second Bitcoin halving occurred on July 6, 2016, as block number 420,000 was produced and miners began collecting 12.5 BTC for every new block, which is the current rate. The third halving will reduce that rate in half yet again, which will lower the block reward to just 6.25 BTC, or around $45,000 given the current market price.

Ok, but what’s a “block reward”?

In short: the amount of BTC a miner receives for every new block they add to the blockchain.

To explain this concept in more depth, let’s briefly go back to the roots of Bitcoin — the blockchain. In the most basic sense, a blockchain is a digital ledger that stores information about its transactions in blocks that are each around 1 MB in size. For instance, when person A sends Bitcoin to person B, this transaction will be stored on a block, along with around 500 other transactions that happened at around the same time.

A block reward is the amount of cryptocurrency that miners receive when they successfully validate/mine a new block by solving highly complex mathematical problems with their mining hardware. It is a reward for their hard work.

What is Bitcoin halving?

An event that halves the rate at which new Bitcoins are created. It occurs once every four years.

As many know, Bitcoin’s (BTC) supply is finite. Once 21 million coins are generated, the network will stop producing more. That is one of the main reasons Bitcoin is often referred to as “digital gold” — just like with the yellow metal, there is only a limited amount in the world, and someday, all of it will have been extracted.

Right now, there are around 18 million BTC in circulation, which is roughly 85% of the total cap — but it doesn’t mean that the cryptocurrency is about to reach its limit any time soon. The reason is the protocol, which has been coded into the blockchain from the very start: Every 210,000 blocks, it performs the so-called Bitcoin “halving” or “halvening,” and producing new coins becomes more difficult — just like in gold mining where finding new deposits becomes more challenging over time.

More specifically, the protocol cuts the block reward in half. So, every time a Bitcoin halving occurs, miners begin receiving 50% fewer BTC for verifying transactions.

Death Spirals and BTC — What Happens When Miners Capitulate?

The stagnation of the cryptocurrency market has put Bitcoin’s (BTC) price at risk of further decline, as it struggles to recover beyond key resistance levels. A descending price increases the probability of the so-called “miner capitulation” occuring, which is said to have triggered the major BTC drop in December 2018.

Late last year, the Bitcoin price fell to around $6,000 following three months of stability in a tight range between $6,000 and $6,500. The subsequent drop to the $3,000s happened within the span of just one month.

Why miner capitulation occurs?

Miner capitulation occurs in the Bitcoin market when mining is no longer profitable. As profitability drops, miners naturally sell their Bitcoin holdings, capitulating as a response to worsening market sentiment. If miners begin to sell off, it creates significant selling pressure in the market. Such pressure creates a difficult environment for major cryptocurrencies like Bitcoin to maintain their momentum.

Large mining centers and companies are unlikely to capitulate due to a short-term price slump, as they hold long-term contracts with electricity providers. They also have more capital to deal with instability in the market for an extended time period.

Meanwhile, short-term capitulation among smaller mining companies is likely. Major mining firms closing down one after another could lead to a death spiral in which the Bitcoin network’s hash rate drops to near-zero.

However, as security and cryptocurrency researcher Andreas Antonpoulos previously said, a death spiral or an abrupt drop in the hash rate of the Bitcoin network to near-zero is not likely to happen because miners operate with long-term perspective and strategy. He explained, “Part of the reason that’s unlikely to happen is that miners have a much more long-term perspective.”

Hence, when short-term miner capitulation occurs — similar to late 2018 — the market tends to recover in six months to a year. Currently, it is still premature to predict whether miner capitulation will occur heading into the year’s end. However, if negative sentiment around the market is carried onto the first quarter of 2020, a December 2018-esque capitulation could occur in the upcoming months.

Bearish targets for Bitcoin

Prior to last week, when the Bitcoin price was clearly in an intense downtrend following a brief spike to $10,600 on Oct. 26, many technical analysts predicted a further drop to the $5,000 to $6,000 region.

Crypto trader Eric Thies, for instance, said last week that a key bearish indicator lit up, noting that Bitcoin is due for a deep pullback in the near future. Subsequent to an awkward price action for over two weeks, during which Bitcoin demonstrated extreme volatility, Thies said that BTC could be setting up for a recovery after tweeting on Dec. 1 that the outlook was not great. The analyst emphasized that the current structure is “potentially significant for bulls,” not dismissing the scenario of BTC rebounding strongly to higher resistance levels.

DonAlt, a cryptocurrency trader, said that while it is too early to state that Bitcoin is on track for a full recovery, it would have to reclaim higher time frame levels to engage in any meaningful upside movement.

Higher time frame resistance levels for Bitcoin sit between $7,600 and $8,500, and according to DonAlt, BTC passing those levels in the short-term would indicate a bullish movement. He said, “Now that heads have cooled off, the bullishness has quickly faded. So far, this is a bearish retracement after a huge impulse down.”

Big mining companies are having a difficult time

The break-even price of Bitcoin mining is estimated at around $4,100 to $4,500. According to Miner Hut8, a publicly listed mining giant based in Canada, the firm has mined Bitcoin at a cost of $4,300 throughout the third quarter. The company stated:

“Revenue of $26.7 million; Mining Profit Margin of 58%, and Adjusted EBITDA of $14.7 million. Mined 1,965 Bitcoin at a Cost per Bitcoin of US$4,363 inclusive of electricity costs, mining pool fees, and all other production costs.”

However, cryptocurrency researcher Ceteris Paribus noted that the cost of mining calculated by Miner Hut8 “leaves out depreciation, expenses, and net finance expenses,” which could place the actual cost of mining at $7,100. The researcher added:

“Short-term if the price goes under $7.1k they will keep mining as this is still > operational costs & mining equipment is a sunk cost. But long-term you can’t imply that they are profitable <$5k. They will need to replace equipment, continue paying employees, financing costs, etc.”

The decline in Bitcoin’s price and the increase in mining difficulty has had a negative effect on the mining profit margins of Hut8 as well as other major mining firms. Due to their large Bitcoin holdings and cash reserves, large mining facilities are not at imminent risk of having to reduce their operations to cope with a declining Bitcoin price.

Still, the tough ecosystem developing before miners could take a toll on smaller firms, especially if BTC falls to the $6,000s, a price range that is below the break-even point for most producers.

Halving won’t have an immediate effect

One of the most highly anticipated events of 2020 is the block reward halving of Bitcoin in May. The mechanism, which gets triggered once every four years, would effectively drop the compensation miners receive for mining blocks that contain BTC transactions by half. It also decreases the rate of new BTC production as the network approaches its fixed supply of 21 million Bitcoins.

Since 2018, the halving has been talked about as the next driving factor of an extended Bitcoin rally. As a scarce asset, any event that decreases the supply of the cryptocurrency would theoretically impact its price trend. However, high profile investors have said that the halving is not likely to have any immediate effect on the Bitcoin price.

Related: BTC Miners: No More Basement Rigs, Greater Profits to Come

If the halving occurs without imposing a positive impact on the price of Bitcoin, it would place additional pressure on miners to adopt better infrastructure and efficient equipment to try to further decrease the costs.

Throughout history, the halving has not led to a large rally for Bitcoin until a year or two after the event, possibly because it is priced in well before the event occurs. As such, it is possible that the capitulation of small miners lead to BTC testing lower level supports in the $5,000 to $6,000 region despite being down substantially since mid-2019, creating negative sentiment around the cryptocurrency market in early 2020.

The current price trend of Bitcoin

Based on fundamentals, Bitcoin remains strong in various key areas including user activity, transaction value denominated in dollars, and hash rate. Official on-chain data from Blockchain.com shows that the number of unique addresses used has increased from 310,000 in January 2019 to nearly 500,000 in less than 12 months. The hash rate has also increased, from 41 exahash in January to 92 exahash, more than doubling in the same period.

Bitcoin network hash rate. Source: blockchain.com

Due to the fundamentals, Bitcoin investor Timothy Petersen said that the “2019 bubble” of Bitcoin is likely to burst in about two weeks, marking a potential local bottom by year-end. Hence, if BTC begins to demonstrate an intense sell-off in the weeks to come, the most probable cause of the drop would be capitulation by smaller mining firms. Mining capitulation is also seen as a positive point for medium to long-term recovery by many investors, as it often marks the end of a bear market and the start of an accumulation phase.

T-Minus 1,000 Blocks Until Ethereum’s Istanbul Hard Fork

As of press time, Ethereum has passed block #9068000, putting it within 1000 blocks of the scheduled Istanbul hard fork, which should take place at around 23:30 UTC.

The much-anticipated shift to Istanbul will be the Ethereum network’s first hard fork since February’s Constantinople. Both are stages of a broader phase of ongoing development that began in 2017 called Metropolis

What is changing?

Cointelegraph has covered Ethereum’s ongoing developments extensively, as have the developers. Broadly speaking, Istanbul should be streamlining the network in accordance with Metropolis’s overall goals of scaling the network.

Specifically, Istanbul will expand interoperability with privacy token Zcash. The upgrade will also make zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Arguments of Knowledge) cheaper. zk-SNARKs allow users to demonstrate knowledge without exposing that knowledge — a technology critical to Ethereum’s recent privacy enhancements.

How to prepare?

Per a Nov. 20 blog post from the Ethereum Foundation, if you hold Ether (ETH) or use the network, you probably don’t need to do anything unless you receive instructions otherwise from your exchange or wallet service.

If you are a miner or node operator, however, you will need to update your client to ensure that you are not suddenly stuck running obsolete once the hard fork takes effect.

Future forks?

Ethereum’s future beyond Istanbul remains unsettled. Fears of an impending Ice Age in which block hashing slows down as the network shifts from proof-of-work (PoW) to proof-of-stake (PoS) verification have led to proposals for another Muir Glacier fork to soften the impact of the transition. 

Otherwise, the next planned upgrade to the Ethereum network is called Berlin and is tentatively slated for Q2, though details as to what changes Berlin is going to implement remain limited and largely speculative.

Canada-Based Crypto Mining Firm Great North Data Files for Bankruptcy

Canada-based cryptocurrency mining company Great North Data has submitted a bankruptcy filing, purportedly due to insolvency.

As the Canadian Broadcasting Corporation reported on Dec. 4, Great North Data — which operated crypto mining facilities in Labrador City and Happy Valley-Goose Bay —  filed bankruptcy documents in late November, listing CA$13.2 million ($10 million) in liabilities, while having only CA$4.6 ($3.5 million) million in assets.

Liabilities to the state

With that, Great North Data reportedly owes CA$313,718 ($238,080) to the Newfoundland and Labrador government’s Business Investment Corporation, which the company secured for building, land, machinery and equipment.

The Atlantic Canada Opportunities Agency is reportedly an unsecured creditor for CA$281,675 ($213,868) and funded the company for CA$500,000 ($379,637) in 2015 in the form of an unconditionally repayable contribution.

At press time, the firm’s website is not functional and Cointelegraph has been unable to reach Great North Data on LinkedIn. The firm also has no phone number listed.

Challenging conditions

The industry has become increasingly challenging for miners, with other firms like the former Washington-based top-five crypto mining firm Giga Watt closing down in January, claiming that it was “insolvent and unable to pay its debts when due.” 

In October, BCause Mining, a Bitcoin (BTC) mining operation in Virginia Beach in the United States, was ordered to liquidate its assets, shut down its operations and lay off its 27 full-time and four part-time workers, following bankruptcy documents filed earlier this year. 

Meanwhile, mining firm Bitfarms is still expanding its operations despite complaints of the residents of the city of Sherbrooke, Quebec. Bitfarms reportedly manages five mining operations spread across the province to take advantage of cheap local hydropower, while residents living near the site are complaining about the allegedly intolerable sound and vibrations originating from the facility.

Kazakhstan Won’t Tax Cryptocurrency Mining: Report

Kazakhstan’s lawmakers won’t be taxing cryptocurrency mining until the mined crypto is exchanged for fiat money. According to a legislative analyst at a local blockchain association, cryptocurrency mining will not be treated as entrepreneurial activity but rather a “purely technological progress,” local business publication Kursiv reports Dec. 4.

Madi Saken, legislative analyst at the National Association for the Development of the Blockchain and the Industry of Data Centers of the Republic of Kazakhstan, reportedly announced the news at a local blockchain event “Blockchain Day” on Dec. 4.

Cointelegraph has contacted the association for comment on the report by Kursiv but the organization hadn’t replied as of press time.

Tax liabilities only apply to income in “real money”

According to the report, Kazakhstan’s lawmakers have finalized a draft law on crypto taxation. The bill is currently under consideration with the presidential administration. The bill will reportedly be sent to the Mazhilis, the lower house of the bicameral Parliament of Kazakhstan, in December 2019.

Specifically, the proposed law will establish the legal status of crypto mining as well as rules for its taxation. According to Saken, digital assets and cryptos won’t be considered as subject to taxation because tax liabilities only apply to the income made in “real money.” As such, taxes will only be applicable when cryptocurrency is exchanged for fiat money. Saken elaborated:

“Tax liabilities only emerge when there is an income in the form of real money, particularly when a cryptocurrency is exchanged for real money, which means it is sold on an exchange. Then, this income in the form of classic money will be subject to taxation.”

Mining farms would be taxed by analogy with data centers

However, crypto mining will still be deemed entrepreneurial activity in cases when entities offer services to use their crypto mining hardware, the executive reportedly stated. Mining farms would reportedly be taxed by analogy with typical data centers, the report notes.

Kazakhstan’s government has taken a positive stance towards crypto and blockchain so far.

In 2018, the governor of Kazakhstan’s main financial hub, the Astana International Financial Center (AIFC), claimed that crypto and blockchain innovation will be supported despite the need to regulate cryptocurrencies. In May 2019, the AIFC partnered with blockchain tech giant Bitfury to cooperate on blockchain applications across a number of industries.

Ethereum’s Proposed Hard Fork ‘Muir Glacier’ Would Delay Impending Ice Age

Ethereum developers have proposed a hard fork, named Muir Glacier, that should address the impending Ice Age, which could cause a significant slowdown on the Ethereum mainnet.

In an Ethereum improvement proposal at the end of November, Ethereum developer James Hancock wrote that the proposed Ethereum Muir Glacier hard fork would push back the mechanism, known as Ice Age.

Ice Age is unnecessarily complex and confusing

Ethereum’s Ice Age, also known as Difficulty Bomb, refers to the increasing hashing difficulty in the mining algorithm used to reward miners with Ether (ETH) on its blockchain. This piece of coding artificially slows down the production of blocks on Ethereum’s blockchain and therefore functions as a deterrent for miners who might choose to continue with proof of work (PoW) even after Ethereum has transitioned to proof of stake (PoS). 

However, according to Hancock the existing implementation of Ice Age is unnecessarily complex and confusing to communicate to the community. He adds that any updates to the design should be able to model the effect on the network in a straightforward way that is easy to predict when it occurs. Currently, Hancock does not believe this is the case.

Hancock further points out that Ethereum’s upcoming hard fork would push back the mechanism “as far as is reasonable,” to give developers the time to decide whether to update Ice Age so that its behavior becomes predictable or to remove it entirely. He added:

“This fork would give us time to address the community to understand their priorities better as far as the intentions of the Ice Age, and give time for proposals for better mechanisms to achieve those goals.”

ETH block propagation at least twice as fast

In November, blockchain advisory and product development firm Akomba Labs conducted a test on the Ethereum network that showed it could make block propagation at least twice as fast. Test findings showed that the average block propagation performance dropped from 360 milliseconds without running BloXroute’s Blockchain Distribution Network to 172 milliseconds with it.

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