The Bitcoin mining sector has grown into a million dollar industry, but if the rewards are going to be made half, how it will impact the miners across the globe, and will this have an effect on the network security, this is the central idea of this blog post.
Bitcoin mining over the last decade has been the bread and butter for many people around the globe and an additional source of income stream for the tech-savvy individuals those who make their living via the Internet. Now, the Bitcoin is taking the bold step of reducing the mining rewards to half in the month of May this year, will that mean a dead-end for agencies those who have in the bitcoin mining industry?
A large segment of people related to the crypto world firmly believe that this is an utterly bullish step and see it catapult for the price of Bitcoin in the near future. Now, what effect this is going to have on the minds of the miners?
Coin Rivet did a quick market survey to put forth the holistic overview of this decision via the opinions of the industry experts.
Before we go any further it is imperative to know what is Bitcoin halving? A quick recap, Satoshi Nakamoto, the mysterious creator of the world’s first digital currency programmed the network in a manner the rewards for the miners will be halved with each passing four years.
With the launch of the Bitcoin, the mining reward was tremendous, and inviting for anyone to take bitcoin mining as a profession- it was 50 BTC for one block, then in 2012, it was halved to 25 BTC, 12.5 BTC is the present reward, and this will be again be halved in 2020. Then, in 2024, and so on.
The theme of this digital currency is that the miners are solely responsible for releasing new Bitcoins in the market, so rewards play a big role. But as per the chief of learnbonds.com, editor Edith Muthoni, “As block rewards continue to diminish, so do miners’ rewards.”
She continues: “This brings us into a seeming conundrum: if miners will no longer receive block rewards (or too little), will they continue mining? What will be their motivation to stay on? What does this mean for the network and Bitcoin?”
The Effect of Reward Halving on the Bitcoin Mining: -
In short, this is going to have a drastic impact on the bitcoin mining industry, this is what the global CEO of RRMine, Steve Tsou believes. He said “The halving in 2020 will have great impacts on Bitcoin miners: 1) Miners with low mining efficiency will be forced to pause and re-evaluate their business operations. 2) Digital mining is becoming the racetrack for giant international companies because they have more advanced machines and cheaper sources of electricity.”
"We show that Bitcoin mining is mainly located in global regions where there are large, unused supplies of renewable electricity available...making Bitcoin mining greener than almost every other large-scale industry in the world."
Now, the founder and CEO of Plouton Mining, Ramak J Sedigh echoes the sentiment of Steve by saying: “The upcoming halving will force the small operators and those running S9s out of the market, except in the unlikely scenario that BTC reaches a new all-time high by the end of May.
“The bottom line is, you’re out if you’re not able to upgrade both your infrastructure to the 2500W miner and equipment to the 70+ TH/s or upcoming 5 and 3 NM miners with even higher TH/s.”
CEO of RockX, a digital asset service platform, Alex Lam agrees with the above statement. He is one of China's most prolific miners, and Alex has the first one to use the ASIC miners. He earlier founded the world's most influencing crypto company, RockMiner.
He says: “The next Bitcoin halving is likely to result in mining profitability decreasing significantly in the short term.”
Price of Bitcoin at the Time of Halving
Yes, the general view of the industry experts is that the process of halving the bitcoin rewards will significantly lower the profitability of the bitcoin miners, however, there is still a slight possibility that this won’t happen in 2020. However, this decision will be influenced by the bitcoin price at the time of halving.
Jeffrey Barroga, the digital marketing officer at the Paxful, a peer-to-peer marketplace said: “It all boils down to the price of Bitcoin after the halving.”
He explains: “If there’s no significant increase, Bitcoin mining may no longer be sustainable unless you’re a major mining centre.
“Mining is already competitive and resource-extensive as it is, and when you combine that with the impending block reward reduction in May, hobbyist miners and small players might find that whatever BTC they gain is insufficient to pay for the overhead costs of running their rigs.
“However, expect more miners and fiercer competition if the value of Bitcoin reaches $20,000 again.”
Jimmy Nguayen, the president of the Bitcoin Association and a bitcoin SV (BSV) believe that the halving won’t, he supported the statement by saying: “Some people expect the coin price to magically increase before the halving and help cover the 50% fewer coins. Even if there is some price increase, it is doubtful coin prices will double from now through April or May 2020. So mining will most likely be less profitable after the halving than it currently is.”
So, Now What Does the Hash Rate, and Why It is So Crucial?
To simply put forth, the greater the computing power, the more secure the bitcoin network will be. Therefore, if the hash rate is heading in the upward direction, then it is a clear-cut sign that the network is stable and moving in the right direction.
Loki’s CEO, an Australian privacy tech foundation on blockchain, Simon Harman believe that the hash rate will be affected by the rewards halving in 2020, but will be for a limited time period.
He states: “If the reward halves, the hash rate is likely to drop off steeply. However, because there is less supply being created over time, the halving may cause the price of Bitcoin to rise, thereby increasing the value of the now smaller reward.
“This means that in the long run, the halving will probably not have a major impact on hash rate.”
Lam further explains that, although the hash rate may decrease in the short term: “It is unlikely that hash rates will drastically decrease.” This is due to several factors, not least because of the time of year the halving occurs – during the rainy season in China.
He says: “The rainy season in China starts around the same time in mid-May. There have previously been surges in mining activity in China at this time of year as large mining farms can run at a very low cost due to cheap hydroelectricity during the rainy season.”
Moreover, as Komodo CTO Kadan Stadelmann adds: “It’s important to note that the Bitcoin network has been growing steadily (in terms of hash rate and difficulty) for the past two years, despite mostly bearish market conditions…
Presumably, this means that miners are finding a way to stay profitable, even with the higher mining difficulty.”
How Can Miners Stay Profitable?
Harman cuts to the chase: “Mining is a zero-sum game, in that all miners compete for the same reward. If profitability falls below zero, some miners will switch off their hardware to someone else’s benefit. The key to maintaining a successful mining operation is to always have the most efficient hardware and the cheapest electricity.”
Barroga agrees that Bitcoin mining needs: “Efficiency. Efficiency. Efficiency. In order to remain profitable, Bitcoin miners need the most energy-efficient hardware such as the Dragonmint T16 and the Antminer S9. These are the best mining hardware to date – boasting incredible processing power with the lowest possible power consumption.
“Miners will also have to move their operations to regions with cold weather and abundant cheap electricity. Bitcoin mining drains immense energy… By moving to cold areas, miners can drastically cut energy consumption from cooling systems, thereby making the operation more profitable.
“Some mining companies have already moved to Ulaanbaatar, Mongolia, and Bratsk in Russia, where the weather is cold and the electricity is cheap – and you can expect more companies to do the same.”
Lam adds: “In order to remain profitable, Bitcoin miners should choose mining rigs with the lowest power consumption—this is the best choice for those making a long-term investment in mining—or else lower the frequency of mining rigs to decrease their energy consumption and avoid hardware wear-and-tear.
“Of course, the best way to protect mining’s profitability is to make use of the cheapest source of electricity.”
Tsou believes that digital mining is the way forward: “Low energy prices enable our platform to provide stable services. Global digital mining is undergoing industrial transformation. The industry will definitely have a hash rate infrastructure platform in the future. RRMine has aimed at this position.”
What Happens if All the Bitcoins Have Been Mined?
Muthoni says: “Thankfully, Satoshi had it all figured out. He programmed the network to include a protocol that will provide transaction fees as the other incentive for miners. In other words, the compensation system for miners will transition into transaction fees.”
But will transaction fees alone be enough to sustain the network and reward the miners? Lam believes so, saying:
“Yes, in the long run, the Bitcoin network will still be sustainable. This is because transaction fees will be higher in each block as mining gets increasingly sensitive in the coming Bitcoin halvings. Users will also have to pay enough to miners to ensure they don’t shut down, which would make the whole network less secure.”
Nguyen points out the fact that by the next halving, almost 90% of all Bitcoins will have been released. He says: “The ‘subsidy’ amount per block is paid by releasing fresh coins from the original 21 million supply. But the supply of fresh coins to pay the ‘subsidy’ amount to miners is rapidly dwindling.
“When viewed in this light, it is obvious the subsidy amount per block was never meant to be the primary source of revenue supporting miners forever. Transaction fee revenue always had to grow to overtake the subsidy amount of fresh coins… The Bitcoin network can only thrive long term with massive scaling and big transaction volume.”
In a nutshell, the bitcoin halving will have a big impact, both in the short and long-term as per the industry experts.