Why Bitcoin's Halving Was a Boring Vindication

An event anticipated in the bitcoin community for years came and went last week with little fanfare and, a week later, little impact.

At approximately 12:48 EST, the 420,000th block on the bitcoin blockchain was mined and sealed by F2Pool, one of the largest bitcoin pools, earning its members 12.5 BTC. This marked the second halving, and the first time a miner would receive the reduced subsidy.

Programmed into bitcoin's code, a halving event is when the subsidy for miners securing the network is cut in half. When bitcoin creator Satoshi Nakamoto first released bitcoin, miners earned 50 BTC per sealed block. Three-and-a-half years later, or 210,000 sealed blocks, that reward was automatically cut in half.

This cut in the subsidy is bitcoin's way of controlling the total supply of currency that will ever be released. When the last bitcoin is released in 2140, there will be a total of 21m total bitcoin in the market, though many will not be in circulation due to loss.

Heading into the event, there were predictions on what would happen, with some speculating that the price would drop immediately after to others suggesting worst-case scenarios.

But what has become clear, at least in the first week after halving, is that halving was just another day for bitcoin.

Price unaffected

One of the primary expectations leading up to halving was that the price would drop due to an expected rumor-and-event cycle, whereby traders would accumulate the asset, riding the excitement up until the actual halving took place, at which point they would exit positions.

Petar Zivkovski, the director of operations at WhaleClub, for example, predicted that the smart money – institutions, professional traders, and other knowledgeable bitcoin traders – would sell their bitcoin holdings at the event.

The day before halving, the price of bitcoin dropped by close to 10%, from $674 to $618, according to CoinDesk’s USD Bitcoin Price Index (BPI). While slightly premature to the actual event, this could have been a sign of that event-based selling.

Yet, since the halving, the price has been in a tight trading pattern between $637 and $673 per bitcoin, or 5% fluctuations.

One possible explanation is that the smart money believes the price of bitcoin is going to go even higher, and that the new supply to the market is being bought, offsetting any sales by the smart money.

Terrence Thurber, founder of Oregon Mines, originally told CoinDesk that he believed the price could reach as high as $900, double the $445 bitcoin had been hovering around prior to the massive run-up in June.

He said:

“The price of bitcoin after the halving would normally be expected to rise as decreasing supply meets increasing demand.”

If 25 BTC is being released into the market every 10 minutes at $660 per bitcoin and the price stays constant, the demand is also 25 BTC every 10 minutes. If the price continues to stay relatively constant after halving, with the number dropped to 12.5 BTC, miners were either not selling all of their coins when they were receiving 25 BTC, or the smart money is selling, offsetting the cut in new supply.

A similar behavior occurred when bitcoin last halved on 28th November, 2012, when the price was $12.35. The price increased by approximately a $1 over the next month, a relative calm despite the predictable nature of the approaching halving. However, by January, the price was beginning to increase until it peaked at approximately $230 on 9th April.

While the price of bitcoin is always in flux, the immediate response to halving was for the price to stay relatively stagnant.

Hashrate stays contact

While price proved stable, bitcoin miners were more immediately impacted.

When Antpool sealed the 419,999th block, it received a 25 BTC subsidy, valued at approximately $16,250 at the time of the block. Only a few minutes later, when F2Pool sealed the 420,000th block, it earned 12.5 BTC, valued at approximately $8,125.

Miners effectively saw their revenue cut in half, which was to be expected. But the anticipated outcome was for the hashrate to drop significantly as well. And while it did drop, from 1,600 petahash/second to a little under 1,400 petahash/second, this is well within the fluctuation of hashing power over the past few months.

Marco Streng, CEO of Genesis Mining, told CoinDesk that efficiency is what matters for bitcoin mining.

He explained:

"For us, the halving didn't surprise us at all. We were prepared for that event to happen. The most important rule for mining is still: 'If you are the most efficient miner you will be able to continue mining while others need to step out leaving you a bigger share of the pie.'"

Further, even with a revenue drop from $16,250 to $8,125, revenues were still nowhere near as bad as they had once been when the price of bitcoin hovered in the range of $200-$300 through much of 2015.

According to data collected from Blockchain.info, revenue from mining was lower than today’s levels from January 2015 to November 2015, with some periods where it rose above today’s daily revenue of $1.07m. During that time, bitcoin's hashrate continued to increase from approximately 300 PH/s to 500 PH/s in the same time period.

But, mining has evolved considerably since that time.

At the start of 2015, miners were still deploying 28nm chips, such as what was found in Bitmain’s Antminer S3, which provided approximately 450GH/s of hashing power per device. Today, Bitmain has its S9, which provides 14TH/s of hashing power per device.

Point being, the hardware that miners use today is far more efficient than it has ever been before, making it possible for miners to earn a return on investment even when revenue gets cut in half.

Eric Mu, CMO at HaoBTC, a mining firm with 5.5% of the hashrate, explained that the vast majority of the cost for the miner was in the actual hardware. Now that they own that, so long as the electricity is cheap, profits can continue to be made.

Ultimately, any miner that was able to survive earning between $5,000 to $7,500 per sealed block (when bitcoin traded in the $200-$300 range) back in 2015, earning $8,125 is still better. For those that couldn’t stomach revenues that low, they likely dropped off back in 2015.

Bitcoin survived

Bitcoin has now experienced two halving events, which, theoretically, should have had a jolting effect on the network and price.

However, what both events showed is that, for the most part, a halving can be pretty boring. While miners are affected, at today’s prices, there doesn’t appear to be an exodus any greater than what the network shows each month.

Segregated witness, an improvement to the code that will solve transaction malleability and open the door to technology like Lightning Network, is still on its way. Companies like OpenBazaar continue to roll out what could be among the first promising consumer apps.

Further, new financial products, like the ETFs proposed by SolidX and the Winklevoss Twins continue to seek regulatory approval. And ultimately, bitcoin continues forward.

While the halving event was an especially boring day for bitcoin, it showed, again, that it continues its journey from a risky experiment to real-world tool.