The halving makes everyone excited, but miners are silently suffering

According to the code rules set by Bitcoin founder Satoshi Nakamoto about 12 years ago, the number of new bitcoins generated in each block was reduced by half after May 13. Previously, each block in the blockchain carried 12.5 new bitcoins, worth about $110,000. Now each block contains only 6.25 new bitcoins, worth about $55,000.

This is a challenge for Bitcoin miners and the mining industry, as they receive the largest share of revenue from block rewards. The halving brings joy to everyone else, but miners are suffering from the side effects of the halving: Bitcoin mining energy consumption may decline in the coming months because the halving of Bitcoin production forces miners to put their mining profits at risk by 50%.

Lower miner income means lower energy consumption

To construct a block, miners need to record a list of all transactions that have been submitted since the last block was created. Then, they compete with each other, performing hundreds of trillions of SHA-256 hash calculations per second, looking for a hash block that matches any correct value.

The winner will receive the block reward (previously 12.5 bitcoins, now 6.25 bitcoins) plus all transaction fees included in a single transaction. Currently, the value of transaction fees is much lower than the value of the block reward - transaction fees per block are around 0.6 bitcoins, or $5,000. Therefore, the block reward halving means that miners' income is almost cut in half overnight.

The sudden drop in Bitcoin mining rewards means that miners have suddenly become much less profitable. Unless the price of Bitcoin rises significantly, we expect Bitcoin miners to temporarily stop investing in new mining operations in the coming months. If Bitcoin mining becomes unprofitable, some miners may shut down less efficient mining hardware because it cannot generate enough Bitcoin to cover operating costs.

In the short term, the reduction in resources available for mining will result in a slower rate of Bitcoin minting. However, the network has an automatic adjustment process to ensure that Bitcoin is minted at a more or less constant rate. The network changes the hash difficulty every two weeks so that the network produces about six blocks per hour. If the network produces blocks too slowly, the network will make the hashing problem less difficult by increasing the probability of getting a hash value. If the network produces more than six blocks per hour, the network will do the opposite, making the hashing problem more difficult to slow down the rate of block creation.

The result is that in the long run, no matter how much hashing power the network has, the Bitcoin network will always produce one block every 10 minutes.

Miners want to make a profit, of course, and competition between miners keeps profit margins relatively stable in the long run. So if the revenue from Bitcoin mining drops by half, that will ultimately mean that miners are spending about half as much to produce those Bitcoins. Electricity is one of the significant costs of Bitcoin mining, so a halving of the block reward will ultimately reduce the amount of electricity consumed by Bitcoin mining by the same proportion.

This is important because the Bitcoin network uses a lot of energy. The exact number is known only to the miners themselves, but the Digiconomist website estimates that the network consumes 50 to 70 TWh per year, which is roughly equivalent to the energy consumption of 8 million people in Switzerland. We shouldn’t expect this number to drop by half immediately, but if the price of Bitcoin remains at the same level, we should expect it to drop in the coming months.

The halving will push up Bitcoin’s price — but not by a dramatic amount

Of course, higher Bitcoin prices can offset this effect. Higher Bitcoin prices push up the revenue per block. Therefore, higher Bitcoin prices will prompt miners to buy more mining hardware and increase electricity usage.

In the Bitcoin world, there has been a lot of discussion about the impact that the halving may have on the price of Bitcoin. This Tuesday marks the third halving of the block reward. The previous halvings took place in 2012 and 2016 (the next one is expected to happen in 2024). In the year after the November 2012 halving, the price of Bitcoin increased 30 times. In the year after the July 2016 halving, the number tripled, and then soared even higher in the second half of 2017.

Bitcoin bulls hope that a 50% drop in the new Bitcoin supply will boost the price of Bitcoin.

However, investors hope that the effect of this halving will be softer. In fact, over time, the production of Bitcoin has been decreasing exponentially, while the stock of existing Bitcoin has been growing. There will now be more than 18.4 million Bitcoins in circulation, and the total number of Bitcoins that will be created is 21 million. In the year before the 2020 halving, only 656,250 Bitcoins were mined, a number that will drop to 328,125 Bitcoins. In other words, the halving will reduce Bitcoin's "inflation rate" from 3.6% to 1.8%.

The difference in inflation rates will get smaller over time, and it won’t have much of an impact on the price of Bitcoin. That’s not to say the price of Bitcoin won’t rise — it’s notoriously volatile. But any effect the halving has on the price of Bitcoin will likely be lost in the hustle and bustle of excitement.