The real buzz in the cryptocurrency industry right now is about the long-awaited Bitcoin third halving, which is only a few hours away. Expectedly, results in Google Trend show an increasing interest in the topic.
Everyone, including critics, is alert as the Bitcoin miners move closer to block 630,000, where the mining reward is scheduled to half from 12.5 BTC to 6.25 BTC. At the time of this writing, the current block is 629967, meaning there are less than 35 blocks left before the halving.
While investors and speculators are expectant and somewhat bullish about the effect the upcoming event will have on the market, let’s look at some of the possible dangerous moments and consequences the halving could bring.
Bitcoin mining is no doubt an expensive business due to its resource-intensive nature. Miners use large amounts of electricity as well as sophisticated and costly mining equipment.
Although it is already a known fact that every halving leads to a reduced mining reward per block, this year’s reduction would have a more negative effect than the last two. Miners will suffer a deep cut in block reward, from $108,294 to $54,146 going by the current price.
With the cost of mining one bitcoin currently around $6,851, the price of the cryptocurrency will need to be around $7,400 for an average miner to be profitable. However, this would likely change after the event, and for the worse.
A February report from a cryptocurrency-focused research firm, suggests that the average cost of mining one bitcoin could almost double and reach $12,525 after the 2020 halving.
Charles Edwards of Capriole Investments predicts the production cost to hit $14,000 after the event, saying it will be the “most brutal Bitcoin Halving in history.”
That would mean trouble for the mining industry as bitcoin mining would become very unprofitable, and small miners may be forced to pack up their mining rigs. The total hashrate of the network is also likely to drop unless the Bitcoin price surge higher than the breakeven cost.
This scenario already happened with Bitcoin forks, Bitcoin Cash, and Bitcoin SV after their halving events in April. Mining rewards per block for both networks were reduced from 12.5 to 6.25 coins.
BSV and BCH miners abandoned both networks as mining the altcoins became a less profitable investment, and they seemingly migrated to the Bitcoin network to continue their mining business.
Lack of enough miners could also slow down the network speed as it was in the case of Bitcoin Cash. A few days after the BCH Halving, the network speed dropped by 83% as only fewer miners were available verifying transactions, leaving the network with a 51% attack vulnerability.
Nonetheless, the performance of forks like BSV, BCH, and LTC is not a yardstick to measure the outcome of the upcoming Bitcoin Halving.
Miners keep the Bitcoin network secure by verifying every transaction. Since the hashing power is distributed and spread across different miners, transactions remain immutable. This means the more miners validating transactions, the more safe and secure the Bitcoin network will be.
Nonetheless, a double-spend attack remains one of the Achilles heels of the network as transactions can be reversed when a mining entity has at least 51% control of the Bitcoin network hash power.
Going by this, the security of the network could be at risk if miners shut down their operations because of decreased profitability. Leaving only a few miners to safeguard the system could lead to a high concentration of hash power, and this vulnerability can be exploited into a potential 51% attack.
No single entity has achieved close to 51% control of the Bitcoin hashrate, which makes the possibility of such an attack very rare. According to a recent study, 65% of the global hashrate comes from China. The highest concentration of the total hashrate in one place is reportedly around 37% in the autonomous Xinjiang region of China.
While the third halving might increase the chances for a double-spend attack on the Bitcoin network, it is still very very unlikely that such would happen, since other factors like transaction fees and difficulty adjustment, would keep average miners in business.
Aside from block rewards, miners also earn fees for verifying transactions. However, it’s worth noting that these fees usually account for a small percentage of the payout that miners receive as most of it comes from the block subsidy.
Luckily, block difficulty on the Bitcoin network undergoes adjustment every two weeks, meaning some average miners are likely to remain profitable.
Crypto traders have been stashing coins, hoping the third Bitcoin Halving would be a big boost for the prices of Bitcoin and the overall crypto market. However, some experts believe that the event will not be the gold rush many expect in the short run.
With the reward expected to reduce and cost of mining to rise, large miners may have to sell their BTC holdings to cover operational costs, which could lead to a selloff.
As always, only time shall tell if the 2020 halving will meet the bullish expectations of the majority or if small miners will regrettably shutter their Bitcoin mining operation.
This article was first published on: May 11, 2020