By Jacob Donnelly
Chandler Guo is the founder of Bitbank, a China-based digital currency company that runs one of the largest mining operations in the world, BW. On average, BW.com accounts for approximately 10% of the total hashrate, an impressive feat considering it launched only two years ago.
Guo said he fears that if the price of bitcoin does not appreciate significantly before or immediately after halving, too much hashrate will drop off the network due to unprofitable mining, making transaction verification virtually impossible.
He said:
“If the price doesn’t go up very quickly, up two times, it means a lot of the older machines will be shut down. They must shut down.”
Bitcoin halving is a roughly once-every-four-year event whereby the consistent supply of bitcoin released is cut in half. When pseudonymous creator Satoshi Nakamoto released bitcoin in January 2009, each block generated a reward of 50 BTC. On 28th November, 2012, nearly four years after the bitcoin blockchain was first launched, the reward subsidy fell by half to 25 BTC.
Satoshi added halving so that the code could continue to provide fresh bitcoins as the network scaled, but would also phase out the production of new bitcoin as it approached the maximum cap of 21 million. However, that sudden drop can shock miners that operate with low profit margins.
Guo believes that miners using less efficient hardware will be forced to drop off the network when the subsidy falls.
“There will be 300 petahash of older machines that shut down immediately. They don’t need to work anymore; they just shut down,” he said.
He went on to explain:
“When halving come[s], for the Avalon A3, Bitminer S3, the cost of the electricity is the same, so it must shut down. For example, the S3 is working 24 hours, they cost $1, for example, and they can mine $1. So if mining equipment can only mine the electricity payment, they don’t need to work.”
Hardfork for difficulty
Miners make money by generating more income than they spend on electricity and the associated costs of running a network of machines that are always churning away. Maximizing profit in bitcoin mining is all about how much hardware someone can throw at trying to solve the next block.
The more hashing power, the more likely a miner is going to succeed on a regular basis.
To solve this problem, Nakamoto included a difficulty equation in the code so that every 2,016 blocks, the code analyzes how much hashing power is on the network and increases – or decreases – the difficulty. Over the past year, the difficulty has increased significantly as more hardware was added to the network.
The reason Guo is so concerned is because of the hard coded time by which difficulty is calculated. If more hashing power was added to the network tomorrow, blocks might be found sooner, increasing profitability for miners and speeding up the time at which difficulty is recalculated. However, if hashing power were to be removed, the opposite occurs.
Guo explained that if a large number of miners are taken offline, it will reduce a significant amount of the total hashing power which, in turn, will slow down when the next difficulty event occurs.
He told CoinDesk:
“When the difficulty doesn’t change, but the hashing power shuts down immediately, there will be no next block. If, after the halving, the price does not go up, but the prices goes down, [there] will be heartache. It means no next block, no blockchain, all of the blockchain will be shut down immediately.”
In other words, because the difficulty won’t change for 2,016 blocks, if 300 petahash were to drop off the network, that would slow down the time between each block.
That slowdown could translate into slower transaction times, creating major headaches for people looking to broadcast transactions. In one worst-case scenario, this situation would lead to a crisis of confidence in the digital currency, potentially resulting in a sell-off. Lower bitcoin prices could result in even more miners shutting down their hardware, sparking a vicious cycle.
To get around this, Guo believes that there will need to be a hard fork to essentially reset the difficulty.
“Some mining pool, together, will change to another chain, to change the difficulty to another chain. [A] hard fork is coming, it’s bad news and the price will crash down again,” he said.
Skepticism of severity
There are others in the community, however, who are not nearly as concerned about the halving as Guo. In their eyes, because a halving event has already occurred once without destroying the network, they feel comfortable heading into this next event.
Eric Lombrozo, a contributor to the open-source Bitcoin Core developer team and founder of Ciphrex:
“I do not believe the halving will have nearly as big an impact on the network as some have predicted. We’ve already had a halving in the past…and we’ve also seen significant sudden drops in bitcoin price – both of these situations imply lower short-term miner revenue. In neither case did we see a significant drop in hashrate.”
The idea is that miners have enough financial dry powder that they can stomach any drops in the block subsidy as the market tries to determine the new price of bitcoin with supply cut in half.
Bobby Lee, CEO of BTCC, which runs the third-largest bitcoin mining pool with approximately 16% of the hashrate, agrees that there will be a drop in hashrate. However, he doesn’t believe it will be as significant as Guo predicts.
“After mining, for sure the hashrate will come down a bit, it will probably come down by 5-10%. It won’t come down by more than 30%,” he told CoinDesk. “We’ve seen it in other cryptocurrencies that at a block halving, the hashrate does come down. That’s expected.”
He went on to explain that he doesn’t see this as any sort of existential crisis for bitcoin and compared it to Donald Trump, the controversial American businessman who is currently seeking the US presidency.
“For people who dislike Trump, they think it’s a huge crisis. But after a few weeks, it calms down,” he explained.
BitFury, a mining company with approximately 10% of the hashrate, said that as a company, it’s not concerned about the halving.
“The important point is that the hashrate decline will not compromise the security of the network and will not make it susceptible to attack. We also firmly believe the upcoming halving event is good for the industry because it will motivate Bitcoin companies to innovate,” said Valery Vavilov, CEO of BitFury, referencing the Lightning Network, Segregated Witness, and sidechains as recent developments.
Others believe that hashrate will actually increase soon after halving, leading to a more difficult mining environment.
Terrence Thurber, co-founder and CEO of Oregon Mines, a bitcoin mine hosting provider, explained that he agrees that the hashrate could drop by 10% immediately after halving, with up to a 30% drop in the short-term. But in the long term, he said, newer equipment will make up for that lost capacity.
He said:
“New generation equipment, such as Bitmain’s model S9, has the ability to quickly add hashrate which, absent changing other factors, would increase difficulty to the point where older generation miners are no longer profitable at most electricity price points.”
No concerns – if the price rises
Obviously, none of this is a problem if the price were to rise heading into the subsidy halving, because more miners would maintain profitability even if the number of bitcoins generated by each block drops by half.
“After halving, it will be difficulty if the price does not go up,” said Guo. “Today, it is still perfect. It’s an old story and when the price goes up, it will be the next story.”
Thurber told CoinDesk that, if bitcoin behaves like other commodities, the price should increase as the supply decreases. If this is the case, then the price would increase enough to offset the loss in supply and even out overall demand.
“Using traditional economic theory, the combination of bitcoin price and difficulty should balance out to basically return the market to the same position it was immediately prior to halving. Thus, if difficulty remained constant, the pre-halving price would double,” Thurber said.
At the same time, Thurber tempered that theory by saying that the final outcome might be entirely different, concluding:
“Of course, bitcoin is a new commodity and doesn’t fit traditional models well.”