- [Andreas] Does halving create mining monopolies
by forcing smaller operations into unprofitability?
If halving cuts rewards then smaller miners will no longer
be able to generate a profit.
Doesn't this mean that eventually
mining will be monopolized?
I don't think that's entirely accurate, James.
So let's break down that sentence
and see how this applies to mining.
Halving cuts the block subsidy rewards,
that is true, cuts them in half.
So we go from 12 and a half Bitcoin per block
to six and a quarter Bitcoin per block.
And that will occur
sometime in may 2020, by current calculations.
Then your next statement is that
small miners will no longer be able to generate a profit.
Well, here's the thing.
The amounts of profit you generate
doesn't depend on the size of the mining facility.
The smoothness of your profitability does,
which is why people join mining pools.
But
if you have an efficient enough
hashing system,
then your profit will depend primarily on
the difference between your input costs,
which are the operating costs in terms of electricity
and the amounts of Bitcoin you generate,
fees of either price.
So,
if everybody's running the exact same ASIC.
and buying electricity at exactly the same price,
then when the block subsidy halves,
everybody's profitability drops by half,
but it doesn't drop differently
for smaller versus larger operators.
The economies of scale come primarily
from the ability to purchase
lots of ASIC mining equipment
at a reduced price
and also to purchase large blocks of electricity
and situate facilities near
an expensive electricity sources.
From that perspective,
larger miners may be
and are sometimes more profitable than smaller miners.
However, with larger miners,
you have other problems
such as, for example,
having to
make massive upgrades of operating infrastructure
when a new, more efficient ASIC miner comes out.
Concentrated risk where,
you know, for example,
a fire in a warehouse
or a flood in a warehouse can take out
an enormous amount of ASIC et cetera, et cetera.
So profitability, especially over the longterm
depends on a very large number of factors
and the economies of scale are not as dramatic
as the block subsidy reduction.
So what happens when the halving happens
is the least efficient miners
become unprofitable.
And that's because their ASIC equipment
or their input price of electricity
makes them unprofitable,
or less profitable than the miners who have
more advanced, more modern ASICS
or have better electricity prices negotiated.
It may be then that at the halving
their profitability drops just below the break-even point
where a miner who has more efficient ASIC
and the lower price of electricity
remains just above profitability.
And that forces them,
if they believe that this is a longterm problem
and they're not going to be able to recover
or that the difficulty is going to
remain the same or get worse,
it may force them to turn off their ASIC equipment
so as to stop using electricity.
And again, what will happen then
is the difficulty will go down.
And that will make everybody more profitable,
including some of the miners
that were previously unprofitable.
It doesn't necessarily mean concentration of mining.
The factors that lead to concentration of mining
have a lot more to do with
the geographic availability of ASIC chips
and the geographic availability of cheap electricity,
and let's say comfortable regulatory domains
or domains where regulation either doesn't exist
or it can be evaded it easily.
Those things affect concentration of mining
primarily by geography,
much more so
than the amounts in the block subsidy.
So halving will increase competition in mining
and it's depending on all of the other factors
that competition may lead to a bit more centralization
or a bit less centralization depending on
how effective and efficient different mining concerns are.
J Smith asks,
what impact is the Bitcoin halving
likely to have on the Bitcoin price?
Thank you.
Now I've said this before,
I don't answer questions about price
and I don't speculate on price.
And the reason I don't is because
we actually don't know.
And I think it's mostly irresponsible
to make predictions about the price.
It's the same as a astrology and reading tea leaves.
These are chaotic systems that respond to sentiment
as much as they respond to fundamentals.
And in these chaotic systems saying things like,
the flag, head and shoulders pattern
that is declining through the 200 day moving average
indicates that blah, blah, blah,
is in my mind pretty much equivalent to saying,
the price will do this because mercury is an ascendant
in the constellation of Virgo.
It's basically guessing
and that you can do a lot of ex post facto rationalization
about why you missed the guess
and why only the predictions that you highlight
are the ones that are correct
and the ones that you don't about are the incorrect ones.
But the bottom line is there is a lot of
cognitive bias that enters these kinds of conversations.
And I don't think that anyone
has any idea of what's going to happen.
If you look at it from a practical perspective,
there is a possibility that after the halving
the price goes down
because people are spooked by the halving,
because they don't understand what will happen.
There is a possibility that the hash power declines
for a short period of time
and that will result in
a slowdown of the network.
as blocks are found less often
until the difficulty re-targets.
Keep in mind we have so much hash power increase
over the last couple of years,
that even if 50% of the hash power was gone,
we'd still end up somewhere where we were in 2018.
And the network will recover in four weeks
or three and a half weeks from that.
The bottom line is that
in my opinion,
what is most likely to happen with the halving,
at least in the short to medium term is nothing much.
And the only reason I would say that
is because that's exactly what happened
in the previous two halvings that I experienced.
A lot of concern
and panic and speculation
proceeding in the months before the halving.
Then the halving happens,
one block rolls into another,
the halving happens as predicted
and nothing much changes in the network.
You have some short term volatility
because everybody's very excited
or very panicked depending on how you look at it.
And then everything returns to normal.
The essence of Bitcoin is
dynamically adjusted stability that reverts to mean
to produce 10 minute blocks for 10 years,
not missing a bit
and still being there the day after
everybody announces it's dead.
So I don't think much at all is going to happen
with the halving.
And I can't tell you what the price is going to do
before, during, after, in the medium or in the long term.
I don't believe that any such speculation
really tells us much.
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