As Bitcoin Payouts Halve, Uncertainty Looms

June 5, 2016, 7:54 PM UTC
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Network cables are plugged in a server room on November 10, 2014 in New York City.
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The hosts who maintain the servers of the Bitcoin network (so-called “miners”) are expecting some bad news early next month. Around July 10th, their pay will suddenly be cut in half, with the reward for a unit of computing work dropping from 25 bitcoins (currently around $14,250) to 12.5 coins. Bitcoin watchers are debating what exactly the consequences of that drop will be for the decentralized payments network, and some think there’s trouble ahead.

There’s no penny-pinching boss cutting fat at Bitcoin, Inc. (Actually, there’s no such thing as Bitcoin, Inc.) The regular halving of miner payouts has been baked into the open-source digital currency since it debuted in January of 2009, occurring roughly every four years. The cuts are intended to slowly throttle the growth of the Bitcoin supply, an anti-inflationary control that helped drive early faith in the technology.

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The first halving came in late 2012, when most miners were still small-scale hobbyists. Now, though, miners are more likely to run huge server farms with thousands of cutting-edge processors and full-time staff. They’re the essential workhorses of the Bitcoin network, processing and recording tens of millions of dollars in payments daily.

And like any business, they have fixed costs—particularly electricity. Chandler Guo, who runs one of the largest Bitcoin mining operations, argues that the impending halving of payouts will render some miners unprofitable, forcing them to shut down suddenly. That could slow down the network, and potentially destabilize it—somewhat like what would happen if Visa suddenly took a large portion of its servers offline.

Normally, the Bitcoin core software is able to compensate for shifts in the miner population, automatically making it easier to earn Bitcoin as the network’s processing power drops. But Guo is concerned that the sudden halving of payouts could push servers off the network too fast for such a corrective to prevent slow payments and instability. That could turn into a market rout, then a death spiral, as falling Bitcoin prices forced still more miners to shut down.

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However, Guo’s prognosis seems like an outlier. Other miners told CoinDesk that they’re watching the long-term value of Bitcoin, not the daily spot price. If enough less-efficient miners power through decreased revenue for even a short while, the network will have time to properly adjust.

And most importantly, while miners will be getting fewer Bitcoins, their greater scarcity should drive the price of each Bitcoin up, not down. Bitcoin’s price has been on a bit of a tear lately, so markets may already be pricing in the impending halving.

That alone might be enough to keep miners humming along.

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