It's an event that brings equal parts predictability and uncertainty.
For close to a year, bitcoin miners and investors have been preparing for a network change nicknamed 'the halving'. At approximately 18:00 UTC tomorrow, the subsidy the bitcoin network uses to compensate miners will drop from 25 BTC to 12.5 BTC, never to increase again.
Yet, despite its scheduled arrival, many in the industry remain unsure just how significant an impact it could have on bitcoin's still-volatile price and the health of the distributed payment network's transaction validators (aka miners).
A programmed feature in the code, the bitcoin subsidy controls the supply of new bitcoins that are released into the market with each new block. When bitcoin first launched, a miner could earn 50 BTC for sealing a block on the blockchain ledger. After 210,000 blocks, or approximately four years, however, the reward was cut in half to 25. And tomorrow, as block 420,000 is sealed, miners will be left with a reward of 12.5 bitcoin.
As currently set, only 21m BTC will ever be mined, a figure that would require the consensus of all or most bitcoin users to change.
Because the figure does not vary or become irregular, there is a steady, predictable supply of new bitcoins. To traders, this has quelled some uncertainty regarding how many new bitcoins could suddenly appear for sale, and to miners, it has provided a steady incentive for them to continue maintaining bitcoin's ledger.
Complicating matters, however, is that not all traders are altruistic and that mining costs money, and since bitcoin's price impacts other areas of the ecosystem, some believe this delicate balance could be altered by the halving.
Petar Zivkovski, the director of operations at WhaleClub, argues that the price of bitcoin will drop after halving, due to the fact it marks a likely exit event for speculative buyers.
Zivkovski said:
"The halving’s impact on price has been felt since September of last year when price was hovering in the $200s. During that time, smart money began buying bitcoin in a market phase commonly known as accumulation."
So, what impact will halving have on the network? What will happen to the price? What can the average bitcoin investor or user expect to happen – or not to happen – once the halving occurs?
CoinDesk surveyed a number of market experts to explore.
There won't be Armageddon
At one point, there were some miners who expressed concern that the halving could impact their profitability, enough so that some would be forced offline. Chandler Guo, the founder of Bitbank and its subsidiary, BW, was one of these community members.
He argued in the beginning of June that, "if the price doesn’t go up very quickly, up two times, it means a lot of the older machines will be shut down. They must shut down".
Further, he cautioned that 300 petahash of older machines could be forced off the network. But, since that interview, the price has increased from $530 to $650, meaning that this dynamic has changed.
Guo's thesis focused on the belief that if transactions took longer to verify, individuals would grow disenfranchised with the network, which could ultimately send the price down. If that happened, especially with the reward cutting in half, the profits for miners could degrade, making continuous mining more difficult.
Eric Lombrozo, founder of Ciphrex and a contributor to the open-source Bitcoin Core developer team, said in June that it was possible that such an event could occur, but that the extent of any impact was likely to be mitigated, based on historical analysis.
He told CoinDesk:
"We’ve already had a halving in the past…and we’ve also seen significant sudden drops in bitcoin price – both of these situations imply lower short-term miner revenue. In neither case did we see a significant drop in hashrate."
The hashrate could decline
While Armageddon is not around the corner, there is agreement that hashrate on the network, which currently stands at 1.54 exahashes per second will experience a slight decline.
Marco Streng, CEO of hosted mining services firm, Genesis Mining, isn’t too concerned about this, however. "I think due to the halving, a slight hashrate drop is realistic to assume,” he said.
Terrence Thurber, co-founder and CEO of hosted bitcoin miner Oregon Mines, echoed Streng's predictions about the network experiencing some drop in the total hashrate.
"We continue to believe that total network hash rate will decrease by approximately 10% after halving as older equipment that is no longer economically viable will leave the network. Later generation machines ... will pick up some of the slack," he told CoinDesk.
Elsewhere, BitFury CEO Valery Vavilov expressed optimism about the halving, though admitted that his firm expects some drop in hashrate.
"Some decline in the bitcoin network hashrate is expected (after the halving), and we believe it will be insignificant," he told CoinDesk, adding:
"The most important thing is that even if the hashrate declines, it will not compromise the security of the bitcoin network."
Mining costs won't be affected
But the drop in hashrate won’t be as significant primarily because the only real cost that miners have is electricity.
Eric Mu, the chief marketing officer at HaoBTC, a mining firm with approximately 5.5% of hashrate, explained that the effect of halving likely won’t be immediate.
"The bulk of the cost is sunk in the form of mining equipment and infrastructure, at least that is our case," he said.
Litecoin’s halving event, which took place on 25th August, 2015, supports Mu and Lombrozo's belief that the effect won’t be significant.
When the halving happened, the hashrate was 1.19 TH/s. Over the following days, that dropped to 1.11 TH/s, which was only a 7% drop.
Charlie Lee, the creator of Litecoin and director of engineering at Coinbase, explained why the drop was so small in a reddit post.
Because China-based hydro power plants generate too much electricity, he explained, they will sometimes give miners free electricity for a share of revenue. Miners may make half as much at halving, but with free electricity, he argued they're still profitable.
The price will drop
But, how the price will be affected remains to be seen.
As noted by Zivkovski, the smart money — institutions, professional traders and knowledgeable bitcoiners — were banking on the rumor and event cycle. It's arguable that yesterday's near-10% price correction was already a sign that this is starting to occur.
Zivkovski said to CoinDesk:
"This is the classic 'buy the rumor, sell the event' cycle. In this case, the event is the halving. Smart (and patient) money, in the most part, is no longer looking to accumulate. Their holdings have more than tripled in value."
And after halving, the accumulators will start looking to liquidate those holdings, Zivkovski explained.
"Post-halving, however, the excitement will die down. Bitcoin, the network, has not changed fundamentally or significant in the past six months,” he said.
While he couldn’t offer a precise prediction on price, he did say that after accumulators take their profits, "a higher support level will form and the cycle will slowly take shape again".
Later, the price will rise
While the price could decline in the short term, it remains unclear how supply and demand will shift after the halving, if it will at all.
Miners are earning 25 BTC today, but it's not known whether they're selling at the same rate to maintain operations now that the price has increased. With prices rising, they could even be holding more bitcoin than they would normally.
Either way, the rate at which they could potentially sell new bitcoins into the market will undoubtedly fall, which could mean that, assuming demand does not decline, buyers will need to acquire bitcoin from the market, which would push the price up.
Where there is uncertainty is how much the price will rise.
"The price of bitcoin after the halving would normally be expected to rise as decreasing supply meets increasing demand," Thurber explained. "The unknown is how much price increase has already been baked into the current price."
But when the halving dust settles, Thurber believes that the price will be even higher than this recent run-up.
He said:
"Presuming the $445 value in May to be prior to a halving induced run-up, the project price after halving is fully absorbed should be approximately twice that level, around $900. Reaching this theoretical equilibrium is likely to take several months if it occurs."
Progress will continue
Ultimately, no matter the outcome, bitcoin has been here before.
It halved, some people stopped mining, but then the dust settled and the network grew, a process that will continue to happen until all 21m BTC are mined.
And as the network continues to grow and solidify, it becomes clear that even an event as jarring as halving can only reassert bitcoin’s continued existence.
Saw image via Shutterstock