One thing that isn’t often considered with respect to cryptocurrency prices is how firm they are the more centralized the mining. This is a controversial point in Blockchain circles, since the whole point of the innovation of digital currency is that it’s decentralized – which means, no one person or authority has control over it. The reality is however that very often, assets that perform the best have a few vested individuals acting as silent “heavy holders” keeping supply off the market.
Bitcoin is no different. Halvening events such as the one this May, where Bitcoin’s Blockchain began rewarding miners with 6.25 coins per block vs. 12.5 coins over the previous four years are commonly assumed to cerate more demand for the coin as the amount of it being supplied is diminished. However, is this the real reason that Bitcoin’s prices leaps after a halevening event?
It’s possible to see the scenario a different way. When you look at the impact of halvening on Bitcoin’s price the first and second time around, you notice two completely different reactions. After the first halvening, almost as soon as the block reward goes down (and even beforehand too) the price of Bitcoin leaps. It is surely impossible for a lower block reward to impact a digital currency price so instantly, so the natural assumption here is that the effect was more psychological than specifically microeconomic. The price stability that has ensued over the third Bitcoin halvening event in the past couple of months is however notable, since it mirrors what Bitcoin’s price did following the previous halvening of the Blockchain’s block reward.
Thus, the question becomes: what has changed between the first halvening event, in 2012, and the second one in 2016 and this year’s? The answer is – miners. Bitcoin was initially mined via CPU and GPU – in essence, ordinary computing power. Then, in 2015, Micree Zhan, an engineer for Wu Jihan, who was one of Roger Ver’s buddies at that time, developed the Antminer for start-up Bitmain. Within about 6 months, five generations of miner upgrades were made until finally, Zhan Ketuan, another engineer, developed the Antminer S5, which could mine over 1 TH/s.
Fast-forward to the Bitcoin halvening event in 2016, and most miners were by then capable at the upper ranges of achieving 13-15 TH/s. That power level actually stuck for the next two years without getting much of an upgrade, too: by 2017, despite consuming 30.14TWh worldwide – which is more than the entire power consumption of 19 European countries combined - Bitcoin miners were still using the Antminer S9 for the most part, which is 14 TH/s. One way to see this is that Bitcoin, quite simply, was becoming extremely centralized during the first half of its second halvening innings. According to Bitmain’s listing prospectus, the company increased revenue from $140 million in 2015 to around $2.5 billion by 2017. Meanwhile, total customers increased by 40,000 in number in the same period, to 46,000 customers. In other words, while sales of mining hardware jumped about 16 times in dollar terms, the total number of new buyers only rose about 6 times. This was during a period in which mining power increases were fairly unremarkable. The implication is that with the stabilization in mining power increases, about a third of the existing customer base simply kept buying up more mining hardware. This is the equivalent effect to that of what we might call here the recentralization effect.
During the 12 months following the second Bitcoin halvening event, Bitcoin’s price rose about 600%, to $2400. If we scale out that effect just another 6 months, the effect was a 30-fold increase in the price, once it piqued at $20,000 / BTC. Ultimately, Bitcoin’s price stabilized at around $10,000 per Bitcoin after it came down from this high during the 2018-2019 period. This commensurate reduction meant that Bitcoin’s price from the point of the second halevening ultimately rose about the same number of times as the increase in Bitmain’s sales during the same period. The implication is that this exponentially widening core of repeat customers were storing the Bitcoin away while increasing hashpower via spending whatever minimal amounts on more mining gear.
Fast-forward to the present, and we have the ultra-efficient Antminer S19Pro ready for market in August this year, just 3 months following the third halvening event. This machine mines at 110 TH/s. Notice that in the past halvening period overall, mining power has risen by around 10 times, but only after the Bitcoin high was reached did any of that acceleration in mining power per hardware unit take shape. In other words, during the period when the Bitcoin price collapsed in 2018, was when the mining equipment makers got their most productive in terms of power per unit.
Once again, the power per hardware unit available seems to have stabilized, and the Antminer S19Pro is simply more cost-efficient than current iterations of the Series 19 model. When this happens, miners tend to spend their increased cost efficiency on loading up on more Bitcoin miners, centralizing the Blockchain further yet again. This effect, remember, is precisely what seems to cause the massive price surges, at first fairly gradual, then more steeply, and ultimately, to a point where it is blown out of all sanity. If that is the case, as it seems to be here, we are somewhere at the end of 2015 up to about mid-2016 right now, which is about 18 months away from where the next recentralized mining sellers will unload their Bitcoin potentially around $250,000 or more.
