Topic: Block Reward changing to 25 BTC in November-December 2012 - page 5. (Read 14770 times)

The 7200 BTC minted daily (compared to the 3600 after the block reward halves) should also be seen in light of the current trading volume of the bitcoin economy. If half of the miners currently sell the BTC they earn from mining, it's 3600 BTC per day. Even if all miners sell their mined coins, it's still only 7200 BTC sold per day. Selling 7200 BTC currently, the price would drop from 5.25 to 5.04. That's a 4% decrease in price. But that's a daily 4% decrease. If only 3600 BTC were to be sold each day (after the reward halves) the downward price pressure resulting from miners exchanging their newly minted coins for dollars would only - at the current market situation - cause the exchange rate to drop to 5.08 BTC. A 3% decrease in price, per day.

So the result of a halving of the block reward will be a smaller downward pressure on the price from miners only selling half the amount of BTC that they were selling before. But the effects of this are impossible to determine without knowing how many BTC are bought per day (and kept), as this would have the opposite effect on the price. The magnitude of these two opposing forces seems to determine the effect a 25 BTC block reward will have on BTC prices.

Mining costs are buffered from affecting price by the Difficulty.
What if the Difficulty doubled tomorrow? Smart miners would turn off their rigs until the difficulty returned to one where they'd make a profit.
The way I see it, it's the same with a bounty cut. Some miners will no longer be profitable, so their rigs will turn off, so the total network hashrate will decline, so the difficulty will decline until miners can be profitable again.

The only effect I can see the bounty cut having on price is that there are fewer bitcoins for miners to sell, so the ask volume will decline a little. But I'm not convinced that that phenomenon will have anything more than a minor effect on the price.

You cannot say for certain because the block reward was never 25.   Certainly it is hard to surmise how it could affect price, but that will remain to be seen.  If the market for btc slows down because miners are providing a constant stream of new coins, it almost certainly would affect price.  It's basic economics.

To what degree, that remains to be seen.

The block reward was 50 btc when we hit $32 in June, and it was 50 when we touched $2 in December.  The block reward has no impact on the price.  It may however have an impact on miner profitability.

Exactly, it's an issue of Bitcoin's stock to flow. That's a process, not an instantaneous event.

For argument, let's say there are 8,000,000 BTC in existence and 8,000 are generated every 2 weeks. The valuation of the 8mm matters more than that of the smaller 8k - if there's demand for the 8k, it won't affect the 8mm very much at all due to the sheer magnitude difference. You can think of it like throwing a rock into a lake - small ripples may occur, but the water level certainly won't be cut in half.

A more likely scenario is that solo miners may begin to drop off, as well as some smaller mining operations. It will gradually become less viable to expend the resources to compete with larger operations that gain benefits from economy of scale. This is also a process that will occur over a period of time, probably while the exchange rate for Bitcoin rises against other currencies.

Why are people talking about lowered supply? The supply isn't lowered by halving of the block reward. The rate at which the supply increases just gets cut in half. I see no reason that it will cause any significant spike in the price - unless, of course, that we expect it to cause a significant spike.

I don't think it matters much at all what the block reward is.  The exchange rate is mostly a function of the demand for the coins already mined, and if the demand isn't much different then from what it is now, I wouldn't expect the price to be much higher than it is now.

because shortly before the block rewards, people will speculate on the price increasing due to the lowered supply, thus creating another (not self-sustaining) bubble. then idiots that didn't learn from getting zhoutung'd for the last 20 times will ruin it again.

It is so hard to tell.  Some think the price will go up (even double) but I tend to doubt that.  I think there will be a rise as supply is cut, but enough people holding coins will sell before then.  So I think mining is going to be much less profitable. 

Supply gets cut from 7200 BTC a day to 3600 BTC a day. Should mess with supply and demand some.

Edit: Honestly, I'm a miner more than a trader... but I'm wondering what the block reward going to 25 BTC/Block would do myself.

Why will bitcoin prices increase because of this?

If mining goes down though, so too does the difficulty, yes?

At the time of writing (2012-02-03 3:00 UTC), we are at block 165105. By block 210000, the block subsidy, or the portion of miner profits that is produced to mint bitcoins and serve as an extra bonus to miners, is scheduled to fall to 2500000000 of the smallest bitcoin units, or commonly 25 BTC. This gives less than 45000 blocks remaining before the subsidy falls. Although the technical effects are well-documented, the economic effects remain unknown. As we approach the date 2012-12-10, the current halving target if blocks continue being produced at 10 minutes every block, speculation should heat up. However, the consensus among Bitcoin speculators is that the effect of the reduction is already priced in.

Miners currently on average earn 0.05 BTC per block in transaction fees. This means that the current block subsidy, 50 BTC, makes up 99.9% of the total block reward. If no drastic changes to average transaction fees occur between now and the targeted date, this change will be a big blow to miners. Since many miners are very reluctant to turn down their rigs even when unprofitable, the difficulty is likely to only drop by a small amount as the total block reward nearly halves.

Luckily, even under a conservative economic appreciation model, transaction fees are likely to increase. While miners are happily chewing away on an average reward of 50.05 BTC per block now, the reward after halving may have taken a dip down to 25.10 BTC, still a drastic reduction.

One cannot ignore the difficulty decrease that is predicted as a result of the drop of subsidy, however it must be pointed out that even as the mining reward is only worth 20% of that in June 2011, the difficulty is 200% of that time. For this reason, mining is likely going to turn unprofitable shortly after the drop. Anticipating the drop, some dormant miners are likely to turn rigs on to complete their mining career for the time being, likely causing continued difficulty increases leading up to the change.

Pools, especially PPS ones and other pools which calculate reward based on 50 BTC, should begin preparing for this change. This means that PPS pools will drop their reward to half of what it is now in around ten months.

A 51% attack if difficulty does drop cannot be ruled out. Although unlikely, if the hashing power of the network does drop to a half of what it was before the change, it will be half as difficult for a 51% attack to be undertaken. Rapid growth in the Bitcoin economy before December, which is a possibity that cannot be ruled out, will also effectively prevent 51% attacks.

Bitcoin, in its current form, has not yet undergone such a severe change in block subsidy, and it never will undergo one of the same severity again.

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