Could the Bitcoin Halving Cause a Price Halving?

On May the 11th, Bitcoin went through its third halving in its albeit short lifetime. Whilst this event was celebrated by most in the crypto community, some bring up some valid concerns about whether or not many miners will be able to survive with their revenues effectively cut by almost 50% in a single day.

Mining is central to the Bitcoin network as its source of security. Miners are incentivized to secure the network based on the bitcoin block reward on offer - which has now halved.

Is mining still profitable?

Given that revenues for miners are now down, there are two ways that they can compensate: either reduce costs by lowering the power they supply to the network or hope that the bitcoin price will double to compensate for the lost revenue. Obviously the second option is not viable so most miners are left with the only option but do decrease their power output by turning off their mining equipment.

The power that miners supply the bitcoin network is known as the hashrate - the measure of processing power supplied by the mining rigs.

With a hashrate dropping there is less power to secure the network. We have seen a 30%+ decline in the Bitcoin hashrate since the halving event which some have lauded as a bullish signal for the price simply because the surviving miners will be less inclined to sell their excess stock. 

Source: Glassnode

The miners who are left securing the network demand more compensation to prioritize transactions. This has led to a spike in the transaction fees in the days post the halving event up almost 10x  the average of the month before the event. It is now the case that transaction revenue now makes up almost 17% of miner’s revenue.

Source: Bitinfocharts

As the cost of mining increases, the harder it is for new miners to enter the game without spending significant amounts on mining equipment. By pushing out new entrants, mining power is likely to become more centralized which, theoretically, devalues the network.

Killing me softly

The centralization of miners is a creeping risk in the bitcoin industry. The biggest risk with mining centralization is the famed 51% which is when a party who controls the majority of the network's computing power can control transaction processing and history. This would ultimately lead to a complete loss of faith in the Bitcoin network and have a destructive impact on the price. This Mexican-style standoff between miners and investors has largely kept the incentive to control the majority of the hash power in check.

Unfortunately as the rewards decline and the costs escalate, the industry ultimately naturally becomes more concentrated and allows only the best equipment and cheapest electricity to survive. 

Stalking Uncertainty

As the future of profitability hangs in the balance for many miners, the question is whether this repeated halving will make the industry unprofitable for all miners. The answer to this question is possibly but not probably. An noted, an increasing source of revenue for miners is transaction fees. As the network popularity increases, so the number of transactions increases which increases the revenue for miners. The design of the network was eventually to have the miners survive purely on transaction revenue once there are no more bitcoins left to mine post 2140.

This future is, of course, still extremely unknown and a lot can change in 100 years. This uncertainty has even spawned hashrate futures, allowing traders to bet on the future of Bitcoin’s computational power. Ultimately, however, for the average Bitcoin investor they are just taking a gamble that the network will remain secure.