The Halving Doomsday Scenario

Monday 25 April 2016

If miners go offline en masse in the summer, transactions will back up and confidence plunge - but is this scenario likely?

There are two looming issues for bitcoin. One is the block size issue, about which we have heard more than we ever wanted to over the past year. The second is The Halving

Sometime in the summer, probably in the second week of July according to estimates based on current Difficulty, miners’ rewards will drop from 25 BTC to 12.5 BTC. This is keenly anticipated by many bitcoiners, since a drop in supply implies higher prices. (This being bitcoinland, all kinds of wild predictions have been made.)

The Doomsday Scenario

But there’s another side to this feature of the bitcoin protocol. Many miners dump some or all of their bitcoins as soon as they receive them to pay for hardware and electricity costs. There’s a fear that if the price does not rise high enough, miners’ subsidies will fall to the point that mining is no longer economically viable - at which point, a significant proportion of the network simply unplugs.

Apocalypse

It's going to get interesting around here. Apocalyptic? Maybe not. A bit frisky? Definitely.

Whilst in the long term that would not be a problem, in the short term it could play havoc. The reduction in hashrate would cause a significant fall in Difficulty, with the result that block times would - temporarily - be far longer. And that means that each block would have longer to fill with transactions. Assuming we’re approaching block limit anyway, the fear is that this would lead to long delays and a loss of confidence (and therefore price).

Choppy waters

Is the Halving Disaster likely? It’s impossible to say, but it’s highly likely we will see some disruption, given that the network is already on a knife edge. In order for things to continue seamlessly as before, BTC price would have to double at the point of the halving. Now, whilst that could happen - there’s no telling with bitcoin - it would not happen cleanly. Any move of that magnitude would be choppy, to say the least. That means more short-termist miners would be switching on and off according to latest Difficulty, potentially wreaking carnage on block times until some sort of equilibrium was reached.

Moreover, in the run up to the halving, we’re likely to see traders taking a position in anticipation of a big move. Sometime around the event itself, the inevitable correction will occur - and the over-correction and the bounce. It’s going to be volatile, complicating matters even more for miners, and therefore merchants who rely on sensible block times and confirmed transactions.

Which is to say that, along with all the block size snafu, it’s interesting times in bitcoin.


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