As history has shown, Bitcoin halving will not cause a sharp drop in the computing power of the entire network

Of all the rules in the Bitcoin code, very few are respected as hard limits on Bitcoin production.

The code that specifies the limit of 21 million Bitcoins will be released over the life of Bitcoin. By limiting the total number of Bitcoins that can be produced, Satoshi Nakamoto can create a definite amount of usable data and a revolutionary achievement.

In part, the limited production of Bitcoin is intended to offset the endless printing of paper currency.

In the original Bitcoin white paper, Satoshi Nakamoto compared Bitcoin to the discovery of gold. He (she) wrote:

“By convention, the first transaction in a block is special, marking the creation of a new coin owned by the creator of the block. This increases the incentive for nodes to support the network and provides a way to keep bitcoins in circulation, since there is no central authority issuing bitcoins. The steady addition of a constant number of new coins is analogous to gold miners expending resources to increase the supply of gold. In the case of Bitcoin, the expended resources are CPU time and electricity.”

However, in the actual code, there is no 'constant amount of new coins'.

Instead, there are regulations in place that dictate how much Bitcoin will be released and when and how the supply will be reduced, ultimately leading to periods of time when no new coins are released.

Whenever a new block is added to the Bitcoin network, newly minted Bitcoins are awarded to any miner who found this valid block. This reward was originally set at 50BTC , then dropped to 25BTC in 2012. It is expected to drop to 12.5BTC sometime in July of this year. This is what we call a 'halving'.

Bitcoin halving in code

According to the Bitcoin Core client, main.cpp, the initial nSubsidy is 50*COIN and the constant is 100 million satoshis.

In the code, there is a column that says:

"Consensus.nSubsidyHalvingInterval = 210000;"

This means that every 210,000 blocks, the number of newly released coins should suddenly halve. When this code runs, it will continue to calculate how many blocks have been solved. When the number reaches 210,000, the first halving will occur.

When the 210,000th block is generated, the number of Bitcoin blocks released will be 50*COIN divided by 2, which is 2.5 billion satoshis or 25 Bitcoins.

In line 1574, the code specifies how to reach the maximum number of Bitcoins. It reads:

If (halvings >= 64)
return 0;

This means that once 64 halvings occur, nSubsidy will no longer be released. In other words, when 50 is divided by 2 64 times, the last Bitcoin will be released to the Bitcoin market, and the total number of Bitcoins in circulation will reach a maximum of 21 million.
Unlike other assets that are considered deflationary, the Bitcoin code clearly states the maximum number of Bitcoins that can ever be in circulation. This number is achieved through this halving process.

Bitcoin Halving and Miners

It is conceivable that when the next Bitcoin halving comes, miners will be the first to bear the brunt.

In the white paper, Satoshi Nakamoto explained that the addition of Bitcoin requires CPU time and electricity. Miners have dedicated hardware that runs constantly to find the next block, using a constant flow of electricity the entire time.

Miners make money when the revenue they earn from mining exceeds the cost of running the operation, which includes not only electricity consumption but also insurance premiums and other expenses required to power high-intensity data centers.

However, due to the halving, miners’ income will also decrease accordingly, which has a significant impact on their business.

According to the CoinDesk Bitcoin Dollar Price Index, the price of bitcoin averaged $577 at 12:00 EST on June 10. If the price of bitcoin were to be at this level when block 420,000 was mined, miners’ revenue would drop from $ 14,425 to $ 7,212.50 in U.S. dollars.

Losing 50% of revenue could cause some bitcoin miners to stop mining. At least one miner has already pulled the plug ahead of the halving.

However, there has been a serious argument against the fears caused by the Bitcoin halving, given that the Bitcoin halving is pre-programmed in its code, so miners may already be preparing for this event. Unlike gold or other precious metals, where new major discoveries can occur at any time, Bitcoin miners know exactly what will happen and when it will occur.

Some people believe that the halving of Bitcoin mining revenue does not mean that Bitcoin miners will definitely lose 50% of their income. They believe that the general demand for Bitcoin will remain stable, and once the number of Bitcoins generated on a daily basis decreases, the price of Bitcoin will rise.

For example, if miners sell 25 BTC generated from each block to pay their bills, this means that approximately every 10 minutes 25 new coins enter the market (this number will fluctuate based on network dynamics).
If the price of Bitcoin remains stable at $577 while these new coins enter the market, this means there will be $14,425 of available demand per block.

If the number of available Bitcoins released every 10 minutes drops to 12.5 BTC, the price of Bitcoin will have to increase to make up for the available $14,425 in demand. Therefore, miners should see that a reduction in mining subsidies from 25 BTC to 12.5 BTC does not mean a decrease in revenue.

Real-world halving

Fortunately, the Bitcoin network has experienced halvings before, although the scale of Bitcoin mining and overall market activity was much smaller back then.

Bitcoin experienced its first halving on November 28, 2012, when the subsidy per block dropped from 50 BTC to 25 BTC.

At that time, the Bitcoin network hashrate was close to 25,000GH/s , a far cry from today. A month later, the network hashrate dropped to close to 20,000GH/s , a drop of about 20%. However, in February 2013, the network hashrate returned to its previous height and continued to rise.

When the first halving occurred, the price of Bitcoin was about $12.25, which meant that miners received about $612.5 for each closed block. By February 2013, this price had actually increased to about $30. Although miners lost half of their Bitcoin subsidy, the rising price of Bitcoin was enough to offset the loss caused by the halving. By April 2013, the price of Bitcoin rose to about $181.

However, 25,000GH/s of computing power (which the average person can achieve by mining at home) is very different from the current industrial-grade computing power (which we see today in mining farms in China, Iceland, the northwestern United States, and the Republic of Georgia).

Now, the total network computing power has reached 1.4exahash , or 14亿gigahash/s . When the second halving comes in July this year, the total network computing power may drop to 1.12exahash .

Fortunately, miners can use Litecoin as a reference for the halving.

The hashrate of Litecoin was 1.19TH/s when the halving occurred. On August 25, 2015, the Litecoin halving occurred, and in the following days, its total network hashrate dropped from 1.19TH/s to 1.11TH/s.

It turns out that Litecoin’s hashrate has only dropped by 80GH/s, or 7%.

Charlie Lee, technical director at Coinbase and Litecoin’s ‘Satoshi’, explained why the hashrate has not actually dropped:

“The hashrate dropped a little, but then quickly rose back to previous levels. This was definitely unexpected, but I think I can explain it. I talked to some Chinese miners about Bitcoin scaling and learned some interesting things. Most miners found that electricity was free or close to zero cost.”

Essentially, because electricity costs are so low, miners have no reason to shut down the hardware they’ve already paid for. In other words, despite the drop in profits, they’re still profitable due to electricity price levels.

Most mining areas provide cheap electricity, so when Bitcoin is halved, a similar result to Litecoin will occur: the computing power of the entire Bitcoin network may decrease, but the decline will not be large.

The true impact on the Bitcoin network — and the price — remains to be seen. The weeks leading up to the halving event are filled with commentary and speculation.