Bitcoin Block Reward Halving

bitcoin

You may have heard or read something about the upcoming Bitcoin block reward halving and may be wondering what all the fuss is about. This article will attempt to go over the basic concepts to give you a better understanding of what this means and what effect it may have on Bitcoin. First I will start with a brief overview, and later delve more deeply into the topic for those interested.

In its simplest interpretation, the Bitcoin block halving will have the effect of reducing the block reward from the current 25 bitcoins for every new block generated down to just 12.5 bitcoins. As of this writing, the halving is expected to occur sometime on June 26th, 2016. This date is not set in stone as it is a prediction based upon upon the current network hash-rate and will fluctuate a bit until we are closer to the true date.

The site http://bitcoinblockhalf.com/ provides a nice countdown timer as well as general summary of the current state of the bitcoin network and will offer the most up-to-date halving predictions.

BTC_Block_Halving

The immediate and most obvious impact of the block halving is that this will reduce the incoming supply of new bitcoins. Since the generation of new Bitcoins, or mining, is computationally intensive due to the strong competition of miners, the expected result of the halving is that it will put increased upwards pressure on the BTC trading price.

While miners are currently rewarded 25 BTC for successfully computing a new block, the cost of the computation power necessary is generally close to that of the reward, thus offering only minimal room for profit. This is because the block creation process is for the most part random, although having higher hashing capacity generally tends to reward more blocks and thus Bitcoin, it is not guaranteed.

For every successful block mined, a significant amount of computing resources must be expended. The most significant of these costs entail power (electrical) consumption and the actual computing hardware, as well as minor costs such as administrative, maintenance, and any rents, fees, etc.

A typical setup for a home miner is an Antminer S7, which has a hashrate of 4.86 TH/s, and consumes 1210 watts. This works out to about 4.0165 TH per KW of electricity consumed. Profitably is thus directly related to the electrical cost, with lower power costs general equating to increased profitability.

Using the current difficulty (144116447847.35), a block reward of 25 BTC, and a mining pool fee of 1% (typical) I have listed some profitability examples below based on using a Antimienr S7. (These calculations are being used for an example only, and do not factor in equipment or other related costs, so actual ROI and profit would need to be calculated separately.)

BTC_0.03KWh

Above we have the profitability calculations from http:/whattomine.com figuring an electrical cost of just $0.03/KWh. While for most people, this is on the low side, I included it to help illustrate the significance of power in the profitability equations. This would usually represent the largest of the mining operations, as they have the most incentive to seek out and locate their operations in areas with the lowest cost power. So using this “best case” scenario, we can see that a single Antminer S7 can net a monthly net profit of $189.03.

Even though I included the other time-frames for illustration, I will use the monthly calculations for comparison purposes. Also, while not part of this discussion, I feel I should point out real large scale miners have additional hardware options than the S7, so their profitability may be even greater.

BTC_0.08KWh

Here we have can see the calculations based upon a more average $0.08 KWh electrical rate. Now we are getting to the point where more home miners and smaller operations would fall into. While still a good electrical rate compared to some areas, it can be considered an average case scenario and represents typical miners. Here we can still see a respectable $145.47 monthly profit from a single Antminer S7.

Antminer S7
Antminer S7 image courtesy of Bitmain – https://www.bitmaintech.com

Considering the cost of an Antminer is currently around $720 (they reduce the price periodically to reflect reduced mining income due to increasing difficulty), we can see it would take around 5 months for hardware ROI at current rates, compared to only 3.5 months to ROI with the above $0.03 KWh example.

BTC_0.13KWh

In the final example above, I have used a rate of $0.13 KWh to illustrate the profound effect electricity has on mining costs. While still profitable, this higher rate reduces out monthly profitability down to just under $102/month, require a full 7 months to ROI on a single S7 miner. Projecting this far out will undoubtedly result in the figures changing significantly by then, and indeed a S7 purchased today running at $0.13 KWh would not meet ROI before the block halving.

All of this brings us back to the effect the block halving will have on the price of Bitcoin, As we can see in the last example above, it already is playing a role on a miners equipment purchasing decisions, at least for those operating in higher electrical cost regions. By looking at the above examples, we can see that all that even if everything else were to remain constant, the block halving will have the effect of reducing monthly profitably due to the decrease reward.

While you might think this would simply cut miners profit in half, it reality it is much more pronounced. Using the average case figures from above as an example, the block halving monthly profit drops from $145 down to $37.67!

BTC_0.08KWh_HALF

This is only 1/4 the profit the miner used to enjoy, as while his income was cut in half, all of his costs remained the same diluting the margin. For miners at the high end $0.13 KWH electrical costs, it is even worse in that the profitability will actually turn negative!

Of course, while these assumptions are based upon today’s environment, we can clearly see that something will have to give, or a number of miners will be forced out of the market. This will have a negative effect in that even more mining power would be concentrated into a smaller number of hands, the large miners with cheap power. This is why most people anticipate some upward pressure on prices as even though the large miners will still be profitable, it will still impact their business. Even if the difficulty were to temporarily decline due to the loss of some smaller miners, things tend to quickly stabilize and others would move in to fill the gap.

More about Blocks and Halving

Now that we have explored the block halving, and possible effects it will have on the price of bitcoin, let us take a deeper look into some the more technical aspects of block halving.

Bitcoin, like most currencies is based upon the simple concept that the number of coins must be limited for the currency to have any value. For Bitcoin this number is 21 million, the most that can ever be produced. In reality the usable number of Bitcoins will be slightly less than 21 million due to unspendable, lost, or burnt (intentionally destroyed) coins.

New Bitcoins are slowly created into existence by following a mutually agreed upon set of rules. These rules are part of the Bitcoin protocol and software programs use these parameters to perform a hashing algorithm in what is known as mining. Mining bitcoins requires running a specialized software program that searches for a hash, or solution to a very difficult math problem. This is sometimes known as the target. This includes the calculation of a hash of the a block header, which contains a reference to the previous block, a hash of a set of transactions, and a nonce.

The difficulty of this problem, or calculating the target, is precisely known and is simply referred to difficulty. The current difficulty for Bitcoin is 144116447847.35.

If the hash value is found to be less than the current target (which is inversely proportional to the difficulty), a new block is formed and upon acceptance by the network, the miner gets credited the newly generated Bitcoins (currently 25 per block). If the calculated hash is greater than the current target, it is discarded and the process repeats with a new nonce being tried, and a new hash calculated. This hashing is done millions of times per second by each miner and what constitutes the majority of computations, and thus the bulk of resource consumption in the mining process.

The difficulty is automatically recalculated every 2016 blocks (approximately every two weeks) so that the number of blocks produced averages 6 per hour, or one new block every 10 minutes. When a solution or hash that satisfies the requirements is found, the miner will broadcast it out to the network along with other information, such as transaction data, packaged together in what is called a “block”. The solution or hash itself is known as Proof or Work or simply referred to as PoW.

Currently a miner who successfully hashes a new block will receive a reward of 25 bitcoins. This amount, which is known as the block reward, is the incentive for miners to perform the hashing (computations) required for generating new blocks and in general keep the bitcoin network secure and functional.

Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins will be reached. This is expected to occur sometime in the year 2140. After this point the mining incentive will be rewarded solely from transaction fees.

As part of the gradual transition from incentives (block rewards) to fee based mining, the block reward is halved every 210,000 blocks, or approximately every 4 years. This means that number of bitcoins rewarded, or that can be “mined” in a block, is reduced by 50%. For the first four years of its existence, until November 2012, the block reward was 50 bitcoins. Since then only 25 bitcoins have been generated per block. After July 2016, this will again half to just 12.5 Bitcoins being rewarded per new block generated.

The following gives a quick overview of this process:

Block 0 – January 3rd, 2009 – First (genesis) block created (50 unspendable BTC created)
Block 1 – January 9th, 2009 – Second block created (50 BTC reward)
Block 210, 000: Nov 2012 – First halving (25 BTC reward)
Block 420,000: est: July 26th, 2016 (12.5 BTC Reward)
Block 630,000: est: 2020 (6.25 BTC Reward)

Block 6,929,999: est. 2140 (0.00000001 BTC Reward) 1 satoshi, or lowest current divisible unit
Block 6,930,000: est. 2140 (0 BTC Reward) All income from this point on is from fees

Block 0, also known as the genesis block, was the first block of the block chain. Modern versions of Bitcoin client assign it block number 0, although some older versions gave it number 1. The genesis block is hard-coded into the code, as it is a special case in that it does not reference a previous block. In addition the 50 bitcoins generated in the genesis block are not spendable.

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