As Bitcoin Halving Dust Settles, Network Awakens to Costly New Reality
Now that the Bitcoin block reward has been halved, BTC’s hash rate and transaction fees are feeling the impact.
Things haven’t quite been the same since the Bitcoin (BTC) halving. A substantial number of miners have pulled the plug on their equipment due to the halved reward. Consequently, transaction fees are now considerably higher, the hash rate has shed around 25%–40%, and new blocks are generated at remarkably low speed.
So, what can be done to prepare for this new post-halving reality, or will things return back to normal in the near future? Here is a closer look at which blockchain processes have been affected.
One of the most important post-halving trends is the decreased hash rate, which was something experts had warned about shortly before the event. Because the profitability of miners has plunged due to the halved block reward, the older generation of mining units, such as the widely popular Antminer S9, have been mostly turned off. Currently, an Antminer S9 is estimated to generate a negative of more than $2 per day, so it doesn’t make sense to keep such units online unless miners have access to free electricity.
As a result of the halved reward and a substantial portion of outdated miners being unplugged, the BTC hash rate saw a major 30% drop in the three days after the halving. Although there has been a minor rebound since, the metric is still down around 25%.
Given that the most recent difficulty adjustment — a precoded, self-regulating mechanism that occurs every 2016 blocks and is designed to keep mining speed at approximately 10 minutes per block — allowed Bitcoin to regain just 6% of its hash rate, the trend is likely to continue for the next couple of weeks.
“We might see some more miners leave the network for the time being, despite the beginning of the rain season in China,” Ian Descoteaux, the head of mining at Bitcoin.com, suggested in a conversation with Cointelegraph, referring to the most dominant region of the sector.
Miner capitulation has led to a series of consequences for the sector, which include a significant reduction in block generation speed. The BTC daily block generation metric fluctuated at around 100–120 blocks per day following the halving, but then it plunged to just 95 blocks on May 17, thereby reaching its 2017 lows.
“Miners turning off after the halving caused a hashrate reduction, which causes blocks to be found less often than every 10 minutes,” Philip Salter, the head of mining operations at Genesis Mining, explained to Cointelegraph:
“So the blocktimes rose to something like 12min instead of the usual 10min but the capacity for transactions in each block stayed the same. This causes congestion (less space in the blockchain, same demand for sending tx), and this in turn causes an increase of tx fee. Yesterday [May 19], the average block time was 14min, which reduces transaction capacity of Bitcoin.”
This trend has played a big role in the huge increase in fees, Salter continued, adding: “There must also be increased interest in Bitcoin transactions.”
“I feel it [the high fee level] more likely driven by the increasing interest in Bitcoin,” Chun Wang, the co-founder and managing partner of F2Pool — the largest BTC mining pool — stated in a conversation with Cointelegraph. “Not because the halved block reward or slower block generation.” However, the halving might also be one of the major reasons behind the increasing public interest, Wang added.
The increase in fees is perhaps the most notable halving-related ramification. Transaction charges went up by more than one-third three days after the halving, reaching the $5.16 mark as a result of an 800% monthly increase. The escalation has continued since, as the current fee for a single BTC transaction is about $6.65.
Mark D’Aria, the CEO of crypto consulting firm Bitpro, doesn’t find the sudden increase in fees alarming, telling Cointelegraph:
“Even though fees are high relative to the weeks before the halving, they are nowhere near their peak in 2017 and sit at about the range of the mid-2019 rally or the early days of the 2017 bubble.”
But what exactly is driving the fees up? “Fees have nothing to do with mining,” Alejandro De La Torre, the vice president of top four mining pool Poolin, told Cointelegraph. “There is no correlation between transaction fees and mining difficulty.” He elaborated further:
“Fees increase or decrease primarily because of the fee market created in entering the limited space in a block. If there is a continuous amount of transactions in the Bitcoin network then the fees will remain high. The block space is limited, this creates a fee market. Miners naturally choose the tx’s with the highest fees as this will increase the amount of Bitcoin they make.”
In D’Aria’s view, the fees are unlikely to increase further in the near future. “In the short run, I expect fees to quickly normalize back to previous levels, and then continue the slow increase in average fees over the past few years,” he said, explaining:
“There is nothing intrinsic about the halving that will lead to persistently higher fees going forward. All other things being equal, fees would drop back to pre-halving levels once the average block time has normalized down to 10 minutes. But of course this is a multivariate problem and all other things are never equal.”
D’Aria also noted that an increase in market price tends to correlate with an increase in transaction volume, which would in turn raise the competition for block space. On the other hand, he continued, persistently high fees will force high-volume holders to decrease them using external methods such as transaction batching and Segregated Witness.
The revenue for Bitcoin miners has recently reached early 2019 levels for the second time in 2020 — the first time was around “Black Thursday” in mid-March, the day Bitcoin’s price bled by nearly 50%.
This time, Bitcoin’s price has remained stable. But because the halving mechanism caused Bitcoin miners to generate half the amount of BTC — just 900 coins per day as opposed to 1,800 — miners’ profits have been slashed. Specifically, miners earned 2,188 BTC on May 10, whereas this number fell to 852 BTC on May 12, constituting a 61% decline. However, there is a silver lining of sorts for miners: Network congestion has led to a sharp increase in transaction fees, which now account for as much as 17% of miners’ revenue.
Six is a lucky number?
F2Pool recently made headlines in crypto news media after mining six consecutive blocks, covering block numbers 630804 through 630809. While one might suggest that the network has become too centralized as a result of the halving and decreased hash rate, Wang simply wrote it off as “pure luck” in a comment for Cointelegraph.
“It was likely just a fluke,” D’Aria of Bitpro argued in regard to F2Pool’s streak. “A single pool containing 20% of the hashrate is nowhere near dangerous levels of centralization,” he added, elaborating:
“F2Pool has about 20% of the hashrate, so there is a non-insignificant probability that they would mine 6 blocks in a row. Any other pool could in theory also mine 6 blocks in a row, but it would be somewhat less likely.”
Therefore, consecutive blocks are unlikely to be the new norm for the post-halving mining sector, and the network’s security has seemingly been unaffected.
New reality or a temporary thing?
So, will the situation return to normal? As mentioned above, the latest adjustment didn’t make a big enough impact, and experts predict that it might take another three to four corrections (around six to eight weeks) before miners can get back to business as usual. A decrease in the hash rate could also help to normalize the situation, Marc Fresa, the founder of mining firmware company Asic.to, told Cointelegraph:
“The only way to go back to what would feel like normal for miners is if we were to lose a substantial amount of hash rate so the difficulty can adjust even further.”
Investing in the next generation of miners is also a viable option, as Fresa added. Earlier this year, mining hardware juggernauts such as MicroBT and Bitmain unveiled their new units, which are capable of producing 100–120 terahashes per second. Most of these devices are being sold for a June delivery, which is why their impact on the network hasn’t been tangible.
“The fact of the matter is that this is ‘the new normal,’” Fresa concluded. These post-halving realities are not necessarily for Bitcoin at large, however. Some experts argue that the overall volatility surrounding the halving event hasn’t been that extreme, which is why it can encourage further adoption.