Sometime around the end of 2012 the mining reward is expected to be cut in half from 50BTC/block to 25BTC/block.

What effect will this have? Doesn't this mean that it will be less economic to run a Bitcoin miner? Will the hashing power be severely reduced? Will BTC prices soar (or alternatively, crash)?

  • 2
    StackExchange isn't generally a good place to ask questions regarding speculation on future events. – Stephen Gornick Sep 22 '12 at 19:00
  • 3
    @StephenGornick: this question is answerable without any speculation involved. – Stéphane Gimenez Sep 30 '12 at 21:04
up vote 6 down vote accepted

Assuming blocks are solved at the targeted rate of one block every six minutes going forward from today, the date the block block reward subsidy drop will occur happens in late November.

Currently the target rate is 7,200 BTC per day. Starting with block 210,000, this will drop to a targeted rate of 3,600 BTC per day.

This event has been known (and anticipated) since Bitcoin was first released to the world in 2009.

Whether this will cause the exchange rate to rise or fall or the amount of hashing power to rise or fall is mostly speculation.

If investors are counting on the price going up, maybe to $20 let's say, and instead it sticks at around $12, then maybe they sell as it didn't deliver the gains they were hoping for. So the lowered new supply of coins doesn't necessarily guarantee a corresponding rise in the exchange rate.

The amount of hashing that occurs will roughly approximate miner's profitability. As long as miners can mine profitably, they will continue to mine. If their revenue drops by half but it still exceeds the cost of electricity and other operating costs, then they will leave the equipment operating, bringing in mined coins.

Those miners whose costs put them among the least profitable will likely be forced to drop out. These are those who currently mine with a GPU and pay avergage (e.g., $0.12 per kWh) or above average electric rates. Unless the future exchange rate rises faster than difficulty from here, come block 210,000, possibly 50% or more of GPU miners will be dropping out -- either immediately if the have done the math, or within weeks when the total revenue calculation for the first month after the drop gets matched up against the monthly electric bill.

FPGA miners operate 5X or more efficiently in terms of electrical consumption so they are still producing positive cash flows and thus most will continue mining even after the drop.

The four basic laws of supply and demand are: If demand increases and supply remains unchanged, then it leads to higher equilibrium price and higher quantity If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and lower quantity. If demand remains unchanged and supply increases, then it leads to lower equilibrium price and higher quantity. If demand remains unchanged and supply decreases, then it leads to higher equilibrium price and lower quantity.

Now the big questions to answer are "What will happen with demand" and "What will happen with supply".

At first glance it looks like that due to the decrease of the block level award the supply of BTC will be halved. At the same time there are no signals that demand will change. You could argue that demand goes up, as more and more entrants get into the market to try out the Bitcoin ecosystem. Some will conclude that prices will go up.

However supply is not only determined by the amount of newly created BTC's. We still have a stock of 10 million BTC's. It is fair to say that 80% of these BTC's are hoarded. There is unfortunately still no real economy based on BTC's. They are not commonly used to pay salaries and pay bills of suppliers. All the ASIC suppliers quote and invoice their Asics in US$ (and yes, you could buy them in BTC as well). As long as even the larger players do pay their suppliers, investors, tax bills and employees in fiat currencies it is fair to assume that we have a overhang stock of at least 8 million BTC. Of course people will argue that MTGOX is trading 50.000 BTC/day. Yes, true, but this is nothing else of transferring BTC from one hoarding wallet to another one.

Once pricing goes up, more and more of these speculative BTC will come on the market, driving prices immediately down. My simple conclusion is that demand is going slightly up, supply remains the same, pricing of Bitcoin will raise slowly.

Now what will happen after all these ASICs comes on board of the Bitcoin network. Well, something interesting will happen. Total demand will again slightly improve. Supply will remain the same at 3600BTC/day plus supply from "stock". So nothing structural will change.

There will be at least 15.000 ASICs on the market, assuming three manufacturers will eventually get there, each of them at least supplying 5000 ASICs. With 3600 BTC/day available, this will give each of the ASIC 0.24 BTC per day, at today's BTC pricing something like $3/day/ASIC.

At the moment these ASICs comes at the doorstep of a miner they have a limited time to cash. The resale value will be zero, as these ASICs do not have an alternative use (may be a heating device for a cup of t). This means you have to fully write them off at once. To get any ROI these miners can do two things: Speculate (and hoard) or sell their Bitcoins asap. Hoarding doesn't guarantee a ROI, so they will have to start selling their Bitcoins.

The minimum price they want to see for their BTC's is at least the price which covers their variable costs (Their electricity bill). Everything above this price will support their write-off and the time they are devoting to the project. With the power consumption of 50W per ASIC you will get a electricity bill of 1.2 KWh per day. This will be the minimum price per ASIC. By 15.000 ASIC's, each ASIC in average gets 0.24BTC, so 1 BTC will have a variable costs of 5KwH/day. Say 1 KwH costs you 0.2$, it is fair to say that the variable costs will be $1/BTC. This will be the case until new technology with a higher efficiency will get into the market.

Now with 15.000 ASICS in the market, an unlimited amount of more ASICs able to enter the market, electricity bills to be paid and a "hangover" stock of more than 10 million BTC's miners are forced to sell. This will drive prices down to $1/BTC, as soon as ASICs will be connected to the Bitcoin network.

Assuming miners don't currently make a big margin, when the bitcoin supply will be divided by 2, so will the global amount of money they devote to bitcoin mining. In practice this means that several miners will stop mining, for the activity is no more profitable to them. So, if it was not fluctuating so wildly, you could expect the total hashing power be divided by two.

And there's no reason for the value of bitcoin to change, unless some think the decrease in hashing power could be a threat for the bitcoin network security (which I don't think could be relevant in 2012). Contrarily to the potentially sharp decrease in hashing power, a decrease in value due to this threat would be anticipated long in advance.

Probably not much will change. The pools might be less inclined to take zaro fee transactions, price might go up, etc. As the drop is long planned, no panic should occur, and people shouldn't be making sudden changes. However, only time will tell in the end, and this question solicits speculation...

  • Why do you suggest the price might go up? Also, some miners could quit "suddenly" when the reward is halved. For example if the price they pay for electricity is already to high to make mining profitable. – Stéphane Gimenez Sep 22 '12 at 19:59
  • @StéphaneGimenez I think it might go up because the amount of new coins generated will go down. Some miners would struggle with the profit margin, so they will try selling Bitcoins for a higher price than usual, so eventually it should go up. Miners that would be making a profit anyway will probably also use this opportunity to jack the price up. I know I would try that. – ThePiachu Sep 23 '12 at 4:36

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