How Bitcoin's Second Halving Came and Went, and Not Much Happened

Bitcoin's block reward halved for the second time last week, from 25 to 12.5 bitcoins. The event, commonly referred to as “the halving” (or sometimes: “the halvening”), was a key moment in Bitcoin's history. Such halvings are scheduled to occur once in about every four years, and they ensure that no more than 21 million bitcoins will ever be in circulation. Unsurprisingly, the halving was highly anticipated, and predictions on how the event would impact the Bitcoin ecosystem abounded. One week since the second halving, this is the aftermath.

Price

Perhaps the most debated issue leading up to the halving concerned Bitcoin’s exchange rate. As Bitcoin's price is based on supply and demand, some thought a cut in supply would naturally lead to an increase in price. But since the halving did not come as a surprise, others expected the market to have anticipated the supply cut, and would have already priced it in. Others believed that an anticipation of a price increase could actually have resulted in a bit of a bubble, and therefore expected a fall in price.

Now, one week after the halving, it's clear the price has not moved substantially – at least not by such an extent that it is obvious the halving is the cause of it. Hovering around $675, compared to about $650 at the time of halving, the exchange rate did increase by a couple percentage points. But that’s not unusual for Bitcoin.

It can, however, be argued that the price increase as a result of the halving did occur in anticipation of the event ‒ that the halving was indeed anticipated and calculated in. Bitcoin's exchange rate rose about 50 percent (from $430) in the three months ahead of the halving, and even more than doubled (from $300) compared to a year ago. And, of course, how the halving will affect Bitcoin's price in the near future remains to be seen.

As an interesting detail, the moments leading up to the halving itself did see some increased volatility. In the hour before the first “12.5 Bitcoin block” was mined, Bitcoin's exchange rate dropped more than $30, almost 5 percent, from about $660 to $630. It stabilized to around $650 at time of the halving itself.

Hash Rate

Since the block reward is the main source of income for Bitcoin miners (and Bitcoin mining itself comes at a significant cost), many expected to see a drop in hash rate after the halving. Some predicted the hash rate could drop by up to 50 percent, proportional to the drop in block reward. But even more conservative estimates – by some of the most prominent mining pool operators, for example – predicted a slight drop of 5 to 10 percent, or perhaps no drop at all.

As it turns out, hash rate hardly dropped at all. Current estimates suggest that total hash rate has decreased only by about one percent – or less. And since Bitcoin mining is inherently a game of chance, this slight loss may even be due to variance (“luck”). (This, of course, also means the drop could in reality be slightly more than a single percent.)

Neither does the halving seem to have resulted in significant changes in the Bitcoin mining landscape. While there have been slight shifts in the size of different mining pools, none of these are out of bounds with expected variance. (In this case, BW Mining and Slush Pool seem to have found more blocks this week compared to the week before, while BitFury found a bit fewer. Asked by Bitcoin Magazine, BitFury acknowledged it has not switched off any mining gear, and supposedly is just having a slight unlucky streak.)

That said, it should be noted that one ASIC-producer and mining pool KnCMiner declared bankruptcy last May in anticipation of the halving. (Daniel Masters, who runs a New Jersey-based Bitcoin hedge fund, isreported to have bought a part of KnCMiner's business, which may explain why the pool seems to still mine blocks.)

Stability

The most worrying predictions concerned the stability of the Bitcoin network itself. Several prominent Bitcoiners worried that a sudden drop in income could lead to many miners shutting down their hardware. The resulting drop in hash rate, and subsequent slowdown of block creation, could cause the network to become congested, they warned. In a worst-case scenario, they worried, this could even lead to downward spiral of decreased usability, a falling exchange rate, and, therefore, even more miners shutting down.

Another described threat concerned an increased risk of a 51 percent attack. In this scenario, the reduction in mining reward could knock miners off the network, resulting in an even more centralized mining landscape. This would open up the possibility of miners blocking or even reversing transactions.

Of course, since neither hash rate (nor price) dropped much at all, the downward spiral-scenario did not play out at all. The Bitcoin network is chugging along at a regular pace, with miners mining blocks and confirming transactions as if nothing happened.

And while it seems the share of hash power controlled by major mining pools concentrated in China did increase by a couple of percentages since the halving, there is – again – no reason to think this actually had anything to do with the halving; it could very well be variance.

Additionally, there is little reason to think risks of a 51 percent attack have increased along with it. The three biggest mining pools were already responsible for more than half of all hash power on the network; that has not changed after the halving.