Bitcoin mining rigs have been the Gordian knot tying the price of bitcoin and at the same time deciding the path that crypto adoption process should follow. Considering the history of bitcoin halving, you will notice that miners used to get a bigger slice in revenue as compared to now, and that cost is still set to go lower after the upcoming 2020 halving.
To make it worse, there is a finite number of bitcoins that can be mined (21 million) which puts a timeline for when the last bitcoin will be mined to 2140.
When a crypto enthusiast intellectualizes all this information, it can bring about pain points which if not addressed, can cause a negative ripple in the crypto market.
Let’s face it, many people didn’t accept cryptocurrencies initially because first, it’s an unknown financial entity, and second, its usability was complex. However, after presenting remarkable perks, people became drawn to its technology and have made an effort to understand its mechanisms.
By ill hap, the next halving is less than 12 months away, and bitcoin miners are set to experience fewer revenues. On the other hand, the crypto community has started becoming wary of what happens to Bitcoin when the last one is mined.
This information is confusing, especially to people who have just adopted to cryptocurrency. Luckily, by the end of this piece, you will have a better understanding as you will have a clear view of the future of bitcoin.
The datum that Bitcoin has a finite supply is a fact that doesn’t augur well with miners. The debate on how miners will fare on after the 21 million Bitcoins have been mined has been going on in the crypto space for quite some time now. With the exhaustion of the Bitcoin reserves, miners will lose their block rewards and will need to resort to other ways of earning with bitcoin.
The question of whether mining will still be a profitable venture has had critics harp on the future of miners. With no more block rewards, miners will have to rely on transaction fees to keep themselves financially afloat.
The over-reliance on transactional fees over block rewards will undoubtedly make mining extremely unaffordable and could lead to a decrease of miners, a possible centralization of the network by “Bitcoin whales” as well as a complete collapse of the Bitcoin network.
Bear with me here, even as of now, mining Bitcoin is ridiculously expensive due to the high cost of specialized, high-powered machinery besides power. Analysts from JPMorgan Chase& Co. have established that the cost of mining a single bitcoin outweigh the actual value of the bitcoin itself.
And with the next bitcoin halving event set to occur in less than a year, block rewards will be cut by half (6.25 BTC) leading to a significant reduction in revenue from mining.
Initially, the reward for mining a block was 50 Bitcoins, then it dropped to 25 Bitcoins in 2012, then dropped again to 12.5 Bitcoins in 2019. In 2020, the reward of mining Bitcoin will be 6.25.
The overall effect is that the transaction fees may be too little to keep miners afloat and therefore will be forced out of business especially if they are small scale miners.
Nonetheless, this may not be the case scenario due to several well-speculated reasons. First, with the rapid advancement in technology witnessed over the past century, the coming years could see significant progress in mining technology.
A dedicated small and affordable mining chip would be invented, thus substantially lowering the cost of mining and, in turn, increasing profitability. Additionally, mining hardware would be energy efficient, significantly cutting on extreme energy expenses and increase revenue.
Specialized mining hardware such as application-specific integrated circuits (ASICs) has already been developed to simplify the mining process, as discussed below. In the second possible case scenario, the transaction fees could rise to a level sufficient to keep miners financially afloat.
With the exhaustion of the bitcoin reserves, the supply will decrease, coupled with an increase in demand. Bitcoin will gain a substantial value, and the transaction cost may just be enough for miners to survive.
The current technology used in bitcoin mining is ASIC (application-specific integrated circuit) having evolved from GPUs (graphics processing unit) and later on FPGAs (field-programmable gate array) mining. ASICs have been developed specifically to mine bitcoin and are very effective.
Bitcoin mining is an intensively competitive activity, and its difficulty increases over time. Mining nodes compete with each other to be the first to complete a block transaction and add it to the growing block. You, therefore, need a dedicated bitcoin mining hardware, ASICs to stay ahead of the competition.
For miners, ASICs mean a substantial rise in mining revenue as they can mine BTC at a higher hash rate than CPUs, GPUs, and FPGAs. A good software that is handling ASIC management ahead of its competitors is minerstat’s ASIC Hub.
Currently, close to 17.3 million Bitcoin have been mined, representing a volume of $20.14B and a market cap of $ 173.54B. This means that close to 3.7 million BTC is left to be mined before the 21 million BTC supply is reached.
The actual bitcoin in circulation is way below the 17.3 million mark attributed to close to 4 million BTC, which are permanently lost due to loss of private keys or death of owners.
The last bitcoin is expected to be mined in 2140, where the block reward would be below 1 Satoshi. The question of BTC price is of great concern to most miners. Will the price of bitcoin increase or decrease?
To effectively answer this question, it’s best that we delve deep into Bitcoin evolution involving SegWit and Lighting network.
SegWit (Segregated Witness) refers to a protocol upgrade that involves increasing block size limit on a blockchain by removing signature data from bitcoin transactions. SegWit code was released in 2015 but implemented on Bitcoin in August 2017.
The primary function of SegWit is to separate non-signature data from signature data on each transaction, thus reducing transaction sizes stored on a block. SegWit also eliminates transaction malleability on the Bitcoin network by removing signatures from transactional data, thus paving the way for the integration of the lighting network integration.
Lighting network refers to a “Layer 2” payment protocol that operates on the Bitcoin blockchain. Lighting network adds another layer on Bitcoin’s blockchain, enabling users to create payment channels between any two parties connected by the extra layer.
The lightning network makes fast transactions possible between the participating nodes. SegWit, together with the Lighting Network, irons out bitcoin scalability issues and allows the platform to process millions of transactions per second. Before SegWit and Lighting network implementation, the 1MB block size protocol restricted bitcoin transactions to 7 per second, which significantly limited Bitcoin’s potential growth to become an efficient, widely adopted payment system.
As aforementioned, the implementation of SegWit and Lighting network eliminates scalability issues on the bitcoin platform, ensuring smooth, quick transactions and significantly improving its market value. But this is not promising to bitcoin miners especially after 21 million bitcoins have been mined.
The exhaustion of Bitcoin reserves will mean miners will solely earn through transaction fees instead of block rewards. And with the full integration of the lighting network, there could be far fewer transactions being recorded on the platform daily leading to a substantial decrease in revenue earned by miners. With a substantial deep in revenue, miners would certainly not be willing to sell Bitcoin at a lower price(loss), and therefore, the price of BTC will surge.
However, with such evolution, the price of bitcoin has continually dropped. Since the start of 2018 and into the early phase of 2019, the price of Bitcoin has declined from a high of nearly $20,000 to approximately $ 4,000 representing an 80% decline and an all-time low.
For miners, there are Bitcoin prices that determine whether they are making a profit: all-in ROI breakeven level and cash-cost breakeven level. Once these two factors are negative, it doesn’t make sense to continue mining bitcoin as it will now be a total loss.
Currently, block rewards constitute new bitcoins and will half after every four years until 21 million bitcoins have been mined by the year 2140. The falling profit margin either due to the evolution of bitcoin, halving events as well as the final exhaustion of bitcoin reserves presents a challenge to miners who are uncertain of the future.
Transaction fees will be the only means by which miners may stay financially relevant in the mining industry. Whether these transaction fees would become valuable enough to encourage miners to keep mining is inevitably uncertain as there are two sides to the coin.
The evolution in bitcoin platform, including protocols such as SegWit and Lightning Network, could mean a decrease in the daily recorded transaction and consequently a reduction in transaction fees. But with the exhaustion of bitcoin reserves, the demand for bitcoin could unimaginably get higher as compared to the supply leading to a ridiculously high market price as well as a higher transaction fee to encourage mining.
Nonetheless, with more than 100 years to go until the last bitcoin is mined, a lot could happen in between to incentivize miners to maintain the network. Who knows, Satoshi Nakamoto might even decide to change the consensus governing bitcoin to keep the network afloat.