In a few minutes, cf. countdown, the amount of bitcoins attributed to each block mined will be divided by 2 in one single step. A rare event which happens once approximately every 4 years.
This is an artificial shock which is tolerated by the bitcoin community in the name of misplaced ideology that whatever was decided by Satoshi Nakamoto is brilliant and should not be changed.
However programming a sudden jump in a monetary policy of a crypto currency is a terrible engineering blunder and simply a very bad thing to have.
Does It Matter?
In the short term it will probably have positive effects:
- The supply of freshly mined bitcoins will halve. If the demand for these bitcoins remains constant, the price of bitcoin should increase (!!!).
- The unreasonable miner subsidy for each bitcoin transaction = the amount of money spent by miners to mine [frequently at a loss] in order to support bitcoin will decrease. Less “madness” means, well healthier bitcoin!
On Miner Subsidy
Bitctoin has this peculiar property that miners mine at a massive scale to support a relatively small payment network, compared to more traditional [centralized] payment systems.
Why did we call this madness???
They have never been in a human history a financial system in which each new transaction would require such incredibly large subsidy per transaction, imagine that I sent 10$ do someone using bitcoin. In order to make this transaction work miners have spent a few dollars mining. This is the cost for one single transaction to be included in the blockchain. This depending on its size in Kbytes, the current price of bitcoin, and block reward [to be divided by two now].
This is paid by newly created coins, or as some people have claimed by “debasement” of the currency. More coins means less value potentially for current coin holders. In fact NOT necessarily: the currency do actually appreciate because the bitcoin economy grows.
We could call this seigniorage cash flow or seigniorage income which pays for the network to function. The problem however is that it is quite expensive. It is a very unusual way to pay for a payment network to function here by mining, more or less for profit, or maybe rather at a loss. Seigniorage income is not a pure income without a cost, or income does not equal profits or net income after all expenses deduced. In fact the usual definition of seigniorage is the amount which is the difference between the money face value and the cost of its production. Here this difference is frequently negative [which is not totally unusual, for example many metallic coins are manufactured at a loss by central banks, they cost more to manufacture than the face value]. However someone must pay the bill, there are here questions of altruism, [positive] externalities and hidden subsidies in the crypto currency economy.
Long Term Effects?
Eventually the effect of this is probably a decline of bitcoin in the medium and long term. Why?
- A system with such incredibly large subsidies as explained above poses serious questions about their sustainability.
- Many other properties of bitcoin are SELF DEFEATING: they are toxic to bitcoin and its adoption.
- For example volatility implied by sudden shocks such as current block halving, while the halving could be much more gradual, see Section 13 of this paper.
- Lack of serious protections against 51% attacks and simply bad engineering is THE primary reason why bitcoin is slow. It is because of the risk [real or perceived] that people have to wait for many confirmations to accept payments in bitcoin. Bitcoin is not quite yet the Internet of Money, it is the “Horse Carriage of money” [said in the interview by Dr. Courtois for the Financial Times in 2014].
- Decline in miner income means that miners will be tempted to increase the fees to restore the profitability of mining operations. Increased fees means that people will prefer to use another crypto currency because of lower fees.
- The hash rate is expected to be divided by 2 overnight. Smaller hash rate means 51% attacks will be undeniably easier to execute and confidence in bitcoin could drop. It would be a good moment for bitcoin competitors to get some serious traction.
Hash Rate and 51% Attacks
An interesting question is: Will bitcoin hash rate be divided by two tomorrow?? This would be natural if miners were rational and miner profitability tended to some sort of equilibrium.
We are holding our breath. It can followed in real time here.
In the past the author of this blog has predicted that the hash rate of Dogecoin will be divided by 2 overnight, and this is exactly what happened, in fact it happened in the space of hours, actually it has happened MORE THAN ONCE, and exactly as predicted, in April 2014 and later, see Section 11.4 in this paper and here and here is a video.
BTW. The exact rule is NOT that it will be exactly divided by 2, but it has been a good approximation in the past.
To Decline or Not To Decline
Bitcoin and many other crypto currencies have been genetically programmed to self-destruct. This is undeniable, see this paper.
This “programmed” decline on bitcoin could be very slow and take 10-20 years.
But it could be also very fast, just because miners who are wealthy people with a lot of power influence, will simply decide to mine another crypto currency which is more reasonable [less “anomalous“] or more technologically advanced than bitcoin or simply faster, e.g. Ethereum.
On Strength of Bitcoin
However again, bitcoin is a DOMINANT crypto currency, and as such it will have a tendency to avoid the decline or not to decline. Bitcoin is the Microsoft of cryptocurrency. It enjoys a position of a natural monopoly with lots of positive externalities. A comfortable position which also makes bitcoin does not need to be particularly good at their business, just “good enough” [Antonopoulos LA bitocin meetup]. Some level of madness, or inability to reform/change/improve will not erode its dominant position. Other people need to work very hard to bring innovations and improvements to market, bitcoin doesn’t need to(!). It can cynically adopt them later when they mature.
For a longer discussion of the questions whether bitcoin is exempt from the “programmed decline” which is in the DNA of bitcoin, yet potentially the “dominant position effect” is yet stronger, we refer to Section 12 of our older paper.