As the Bitcoin’s halving approaches, many are wondering whether it will double Bitcoin’s price to compensate for the halved supply, or will lead to a downward spiral and a depressed price due to the growth of confirmation delays.
On July 11th, only two months away, supply halves. Prices should increase, assuming demand remains constant, with many Bitcoiners hoping that the halving will trigger a fourth moon bubble comparable to the stratospheric rise in 2011, Spring 2013 and November 2013. Some argue, however, that this time it may be different because for the first time in its history Bitcoin has a capped transaction capacity.
Transaction volume and price
The relationship between price and transaction volume has been identified as early as 2013 with the following chart showing a remarkable correlation:
Bitcoin’s Metcalf’s Law – Source: Peter Rizun
Due to Bitcoin’s transaction cap, the price has recently seen what many commentators suggest is an unprecedented level of stability, inching towards the range of $470. It may yet break higher, especially as we get closer to the halving, but such breakouts are usually followed by an increased level of transactions, which causes increased delays, leading to complaints and a potential break on price advances.
If this pattern is repeated and the price does not compensate for the reduced supply, the least profitable miners may turn off their hashrate, leading to further mining centralization.
Concerns have been raised that during the two-week period between miners turning off their hashrate and difficulty readjustment, confirmation delays may be exacerbated as blocks take longer to be found. This leads to an increase in fees and a reduction in price, making even more unprofitable miners turn off their hashrate in what may be a downward spiral.
In response to such concerns it is likely that huge mining farms have taken precautions to prevent any downward spiral. Moreover, according to recent analysis, some pool’s profitability is as high as 135%, with most standing above 100%, but Kano pool, which currently has approximately 2% network wide hash-share is only 65% profitable.
Once supply is halved, they may be operating at a loss. Some other pools, such as Antpool, stand at only 105%, which would be reduced by the halving to a tight margin of 5%, assuming no further difficulty increases. At that margin, a profit could quickly turn to a loss.
Jihan Wu, co-founder of Antpool/Bitmain, one of the biggest mining pools and hashrate operators, perhaps recognizing the difficulties that miners may face, has recently made some tweets indicating displeasure at the lack of capacity increase.
Like many other miners who signed the Hong Kong agreement, he would have hoped that segwit could have come to the rescue, but as another softfork is currently in process with barely 35% miner adoption, with segwit not yet released even in mid-May, and the halving only two months away, any such rescue is probably months away leading to the transaction capacity question regaining steam.
In a recent post, Roger Ver, one of the earliest and most vocal proponents of Bitcoin, articulated the position of many in the big block side. Painting a picture of competition in a free market, he argued that if Bitcoin does not provide access then banks will provide a Spy Coin, leading in the long term to a certain eventuality that everyone transacts in a controlled blockchain.
According to Ver, Bitcoin currently has the opportunity to bring its empowering qualities to the masses and thus, potentially, create a more equitable future. Therefore, it should move faster to retain a competitive edge.
Currently, however, Bitcoin is paralyzed, with a transaction cap pricing out businesses, fees increasing, censorship leading to a distorted and divided community and promised capacity increases likely delayed for months.
Bitcoin’s decentralized nature, may, nonetheless, show its resilience, as many “buy the story and sell the news” according to Patrick Dugan, Board member of the Omni Foundation, formerly Mastercoin. Despite the current difficulties, therefore, the price may nonetheless double regardless.