One of the controversial things about bitcoin (BTC) is that it pays the people that keep the bitcoin blockchain running and secure. These folks are called miners, purely because the process seems slightly similar to mining. The process of mining is to run software that executes the search for the solution to a puzzle that acts as the password to creating the next record on the bitcoin blockchain. Success in cracking this puzzle and then creating the next block of records is rewarded in bitcoin. At the moment the reward is 12.5 BTC, which at the rate of $8,000 a BTC is exactly $100,000.
That sounds like a lot of money to solve a lil’ ole puzzle. The trouble is the puzzle is to mash numbers to create a result with say 23 zeros, which, because of the math involved, means you have to do literally zillions of trillions of calculations to find one password code. Miners run these bazillions of calculations, sifting through the wrong answers to get to a single right one. This takes perhaps three years for a specialist machine running flat out at 50 trillion calculations a second, burning a few thousand dollars of electricity as it goes.
That doesn’t sound like a bad business model but as new mining machines enter the game, so the game gets harder, which means that the amount of time taken by any given machine to get a result goes up and so does the cost. Bitcoins difficulty has over the years gone truly exponential, so that the money a machine can make when put into a team of machines halves every six months or so as time passes. That makes making money mining tricky because while you may make great money to start with, after about 18 months it may have fallen to nothing.
Apart from increasing difficulty, mining also gets harder because every so often the blockchain will halve the reward. This last happened in July 2016. The reward is currently 12.5 bitcoin but soon enough the reward will be only 6.175 BTC. The price should rise to pay the miners more for their smaller haul of new bitcoin. If it doesn’t, unprofitable miners must stop work so the difficulty can fall and the job can get easier for those that remain or certain miners must get way more efficient and push the less efficient miners off the pitch.
The reason for this is that the inflation of the BTC money supply by 12.5 BTC every ten minutes, means that there is a new supply of 1,800 coins a day, let’s call it $14 million a day. This $14 million of new supply, which is currently absorbed by buyers, will suddenly be cut in half to $7 million. The demand, however, will remain roughly constant. Unchanged demand coupled with lower supply, equals price up.
This is how it has worked in the past and this is what I’m putting my money on. There are skeptics who suggest that if the price doesn’t move up then miners will wither away, block times will slow dramatically, bitcoin will be less useful, people will panic and dump and so on. However, there are a lot of people like me who would love that and would buy a lot into such a panic. Less supply, same demand, high price, wins the simple proven logical outcome of the next halvening.
But of course people are going to preempt.
To add to the price pressure, bitcoin gets lost. That happens to gold too and was also a problem for gold when it was money. That enables bitcoin to get ever more expensive overtime.
If a Satoshi was 1 cent, bitcoin’s market cap would be 21 trillion dollars, but when you think about it, if a Satoshi was $1 or $100, then it would become a currency much like gold, which in the past was used foremostly as a store of wealth, expressed in the usage for silver coins which acted as a store of wealth for the general usage of copper coins. This is the dream of all crypto fans, bitcoin as the reserve currency of crypto, an incredibly valuable blockchain fungibly linked on top of a hierarchy of other ‘lesser’ currencies.
It could happen.
The upcoming halvening speaks to this dream and it’s coming to the BTC blockchain in May. As a hodl’er I can wait.
Author: Clem Chambers
Source: Forbes: The Bitcoin Halvening Is Coming