Does halving create mining monopolies by forcing smaller operations into unprofitability?

- [Andreas] Does halving create mining monopolies by forcing smaller operations into unprofitability? If halving cuts rewards then smaller miners will no longer be able to generate a profit. Doesn't this mean that eventually mining will be monopolized? I don't think that's entirely accurate, James. So let's break down that sentence and see how this applies to mining. Halving cuts the block subsidy rewards, that is true, cuts them in half. So we go from 12 and a half Bitcoin per block to six and a quarter Bitcoin per block. And that will occur sometime in may 2020, by current calculations. Then your next statement is that small miners will no longer be able to generate a profit. Well, here's the thing. The amounts of profit you generate doesn't depend on the size of the mining facility. The smoothness of your profitability does, which is why people join mining pools. But if you have an efficient enough hashing system, then your profit will depend primarily on the difference between your input costs, which are the operating costs in terms of electricity and the amounts of Bitcoin you generate, fees of either price. So, if everybody's running the exact same ASIC. and buying electricity at exactly the same price, then when the block subsidy halves, everybody's profitability drops by half, but it doesn't drop differently for smaller versus larger operators. The economies of scale come primarily from the ability to purchase lots of ASIC mining equipment at a reduced price and also to purchase large blocks of electricity and situate facilities near an expensive electricity sources. From that perspective, larger miners may be and are sometimes more profitable than smaller miners. However, with larger miners, you have other problems such as, for example, having to make massive upgrades of operating infrastructure when a new, more efficient ASIC miner comes out. Concentrated risk where, you know, for example, a fire in a warehouse or a flood in a warehouse can take out an enormous amount of ASIC et cetera, et cetera. So profitability, especially over the longterm depends on a very large number of factors and the economies of scale are not as dramatic as the block subsidy reduction. So what happens when the halving happens is the least efficient miners become unprofitable. And that's because their ASIC equipment or their input price of electricity makes them unprofitable, or less profitable than the miners who have more advanced, more modern ASICS or have better electricity prices negotiated. It may be then that at the halving their profitability drops just below the break-even point where a miner who has more efficient ASIC and the lower price of electricity remains just above profitability. And that forces them, if they believe that this is a longterm problem and they're not going to be able to recover or that the difficulty is going to remain the same or get worse, it may force them to turn off their ASIC equipment so as to stop using electricity. And again, what will happen then is the difficulty will go down. And that will make everybody more profitable, including some of the miners that were previously unprofitable. It doesn't necessarily mean concentration of mining. The factors that lead to concentration of mining have a lot more to do with the geographic availability of ASIC chips and the geographic availability of cheap electricity, and let's say comfortable regulatory domains or domains where regulation either doesn't exist or it can be evaded it easily. Those things affect concentration of mining primarily by geography, much more so than the amounts in the block subsidy. So halving will increase competition in mining and it's depending on all of the other factors that competition may lead to a bit more centralization or a bit less centralization depending on how effective and efficient different mining concerns are.

What impact is the Bitcoin halving likely to have on bitcoin's price?

J Smith asks, what impact is the Bitcoin halving likely to have on the Bitcoin price? Thank you. Now I've said this before, I don't answer questions about price and I don't speculate on price. And the reason I don't is because we actually don't know. And I think it's mostly irresponsible to make predictions about the price. It's the same as a astrology and reading tea leaves. These are chaotic systems that respond to sentiment as much as they respond to fundamentals. And in these chaotic systems saying things like, the flag, head and shoulders pattern that is declining through the 200 day moving average indicates that blah, blah, blah, is in my mind pretty much equivalent to saying, the price will do this because mercury is an ascendant in the constellation of Virgo. It's basically guessing and that you can do a lot of ex post facto rationalization about why you missed the guess and why only the predictions that you highlight are the ones that are correct and the ones that you don't about are the incorrect ones. But the bottom line is there is a lot of cognitive bias that enters these kinds of conversations. And I don't think that anyone has any idea of what's going to happen. If you look at it from a practical perspective, there is a possibility that after the halving the price goes down because people are spooked by the halving, because they don't understand what will happen. There is a possibility that the hash power declines for a short period of time and that will result in a slowdown of the network. as blocks are found less often until the difficulty re-targets. Keep in mind we have so much hash power increase over the last couple of years, that even if 50% of the hash power was gone, we'd still end up somewhere where we were in 2018. And the network will recover in four weeks or three and a half weeks from that. The bottom line is that in my opinion, what is most likely to happen with the halving, at least in the short to medium term is nothing much. And the only reason I would say that is because that's exactly what happened in the previous two halvings that I experienced. A lot of concern and panic and speculation proceeding in the months before the halving. Then the halving happens, one block rolls into another, the halving happens as predicted and nothing much changes in the network. You have some short term volatility because everybody's very excited or very panicked depending on how you look at it. And then everything returns to normal. The essence of Bitcoin is dynamically adjusted stability that reverts to mean to produce 10 minute blocks for 10 years, not missing a bit and still being there the day after everybody announces it's dead. So I don't think much at all is going to happen with the halving. And I can't tell you what the price is going to do before, during, after, in the medium or in the long term. I don't believe that any such speculation really tells us much. If you enjoyed this video, please subscribe, like, and share. All my work is shared for free. So if you wanna support it, join me on Patreon.