Bitcoin is about to halve. Is it an opportunity to make money or a disaster?

What is the most important day in the cryptocurrency world? I think it should not be the day when the Bitcoin ETF is approved, the New York Stock Exchange launches Bitcoin futures, or the Nasdaq launches Bitcoin futures. It should be the day when Bitcoin is halved twice in the long process of development (nearly 10 years).

Although there are only two historical trends to refer to, Bitcoin has skyrocketed several times each time it halved. It should be noted that there was no news of policy approval before, but Bitcoin was like a rat crossing the street, and everyone shouted and beat it. Bitcoin soared against the trend, rewarding those who were determined with financial freedom.

Therefore, less than a year has passed since the much-anticipated halving in May 2020, and Bitcoin has responded quickly by rising by more than 3 times in the recent past. However, this halving is different from the past. Although there are opportunities to make money, if Bitcoin itself cannot smoothly transition, a huge disaster may befall!

In order to motivate miners to maintain the security of the Bitcoin network, Satoshi Nakamoto established the rules for issuing Bitcoin. The issued Bitcoin is awarded to the miners who win the competition based on the results of the computing power competition. The reward is halved every 210,000 blocks. Each block takes about 10 minutes, which means that the reward is halved every 4 years. At the beginning, it was 50 Bitcoins every 10 minutes. After two halvings, the reward is currently 12.5 Bitcoins every 10 minutes. After the next halving, it will be 6.25.

According to the supply and demand theory of price, the supply of Bitcoin is dynamic and unchanged, that is, 12.5 Bitcoins are currently issued every 10 minutes. The current policy is favorable to Bitcoin. For example, Federal Reserve Chairman Powell believes that Bitcoin is like gold, and the New York Stock Exchange and Nasdaq have laid out Bitcoin futures, which have increased the user-side demand for Bitcoin.

In May 2020, the halving will break the dynamic balance of Bitcoin output, from 12.5 bitcoins every 10 minutes to 6.25. The supply side is halved, while the demand side increases. The overall market sentiment is bullish, and Bitcoin has entered a self-reinforcing stage of rising. In the short period of time recently, it has outperformed the yields of all global financial assets.

Therefore, no matter what, before the next halving day arrives, this self-reinforcing stage will gradually strengthen. Like the previous two halvings, there are opportunities to make money. This is also the most direct reason why retail investors, financial institutions, and giant companies are rushing into the market and laying out in the field of cryptocurrency!

In the Bitcoin network, because it is distributed, its security is guaranteed by the number of miners, or more precisely, by the decentralized computing power. If the computing power of the entire network is too low, it will easily cause security issues (double-spending attacks). If a security issue occurs in the Bitcoin network that has never had any security issues after the halving, we can consider it to be devastating to Bitcoin. The dream of world currency will be shattered and it is destined to be a market for niche players.

Bitcoin miners are profit-seeking, which is the most fundamental reason why Satoshi Nakamoto incorporated human profit-seeking and game theory into the design of the Bitcoin network to ensure that the Bitcoin network can run well for 10 years. The halving is actually the most troublesome time for miners, because the output is halved, and from the perspective of currency standard, the income of miners is also halved. Although the halving transition has been four years, it is still not smooth enough when it comes to a certain node. For example, the reward obtained by miners from the previous block to the next block is suddenly halved, which is a steep drop. Especially when the cost and income are close, most miners will face downtime, which will seriously threaten the security model of Bitcoin.

Some people say that there are two reasons why no disasters were found in the transition in the first two times. First, the price increase of Bitcoin during the rising process is greater than the increase in computing power, and the halving has a slightly smaller impact on this. Second, the first halving was due to the development of chip mining machines by Baked Cat, which replaced the graphics card mining machines. The technological progress reduced the cost of miners; the second halving was due to the iterative development of Bitmain's chip mining machines, which also reduced the mining cost of miners. In this halving, we found that the research and development of chips has encountered the bottleneck of world technology. The mainstream mining machines have not been iterated for 2-3 years. Even if new mining machines are launched, there is no obvious advantage in reducing costs. This means that the mining market will face huge pressure, threatening the security of the Bitcoin network.

Assuming that the profit-seeking nature of the Bitcoin system will work again and human greed will continue, there will be two solutions to solve the miners' problem. First, strongly promote the surge in Bitcoin after the halving, and offset the cost pressure caused by the halving through a surge in the price relative to the legal currency; second, increase the handling fee income of miners for packaging blocks to make up for the losses caused by the halving.

First: strongly promote the surge in Bitcoin after the halving. This requires all participants to reach a consensus that Bitcoin will replace legal tender as the global currency, which is often accompanied by policies, such as the recognition of Bitcoin's currency status by major countries and its use as foreign exchange reserves, and the increase of its application scenarios equivalent to legal tender. This is quite difficult, but it is a problem that must be considered in each subsequent halving, and this halving may not require such a large demand, so on the demand side, as long as some large institutions recognize and hold Bitcoin, it will be enough to survive the crisis and promote the surge in Bitcoin. There are already reference bases, such as the approval of Bitcoin ETF, and the good development of Bitcoin futures on the New York Stock Exchange and Nasdaq!

Second: Increase the miners’ fee income. The first one above is to rely on external government approval, and the operability is still not very strong. Let’s take a look at the solution to increase the miners’ fee income internally. We know that the miners’ income comes partly from the blockchain rewards and partly from the miners’ fees. If the block rewards are halved, the increase in fees can also make up for the income. At present, the miners’ fee income accounts for 5% of the rewards, which means that the fee income must be increased by at least 10 times to achieve balance.

However, we found that the Bitcoin network is often congested, and the demand for on-chain transfers continues to increase. Miners will prioritize packaging transactions that are willing to pay relatively expensive fees. Currently, the fee expenditure for an on-chain transfer is about a few dollars. If it is expanded 10 times, it means that it will cost tens of dollars. It is obviously impossible to execute on the main chain. According to the current Bitcoin soft fork route, it can only be executed off-chain, and small transactions will be removed or even eliminated from the Bitcoin main chain, similar to exchanges, where internal transfers are free and only on-chain transfers require fees.

There are also Bitcoin side chains, such as the Lightning Network, which can also do this. Lightning nodes only need to charge almost zero handling fees, increase the handling fee income of lightning nodes through high-frequency transfers, and reduce the frequency of transfers on the main chain, which can hedge the high handling fees on the main chain, provided that the Lightning Network is fully developed. However, despite the rapid development of the Lightning Network, as of the time of writing, there are only 941 Bitcoins in the channel, which is far from enough. In the next less than a year, it will need to continue to develop!

Summary: Bitcoin is less than a year away from halving, and the much-anticipated day is coming. There is no doubt that there will be opportunities to make money in the Bitcoin market during this period, but there are still many challenges to face if you want to safely transition to halving. Be prepared for danger in times of peace, and don't just focus on the benefits of halving that you see right now, but also pay attention to the problems brought about by halving. The former is short-sighted, and the latter is for long-term planning. The mantis stalks the cicada, but the oriole is behind. Don't be blinded by the benefits!