The next halving will lead to further centralization of Bitcoin mining and risk to PoW coins with smaller market caps.
Past Bitcoin halvings have been associated with large increases in the price of BTC and these have become correlated in people’s minds. But correlation is not causation, and it’s possible that Bitcoin halvings don’t cause increases in the BTC price any more than US presidential campaigns or Summer Olympic games do. What does seem to be more causative, however, is the link between halving events and centralization. Why The Next Bitcoin Halving Will Lead to Further Centralization of Mining .
Bitcoin mining is constantly increasing its hashrate through economies of scale and better technologies. As this happens, there’s an increase in the cost of remaining competitive and profitable. Early miners were able to mine on PCs and then GPUs. Today it’s necessary to mine on specific ASIC chips that lose profitability whenever newer tech emerges. When halving events occur, it puts additional stress on miners and makes it unprofitable for large numbers of them to remain in the business. And naturally, those that go under are the smaller mining operations that do not have the economies of scale or sweetheart deals with governments on power rates that the biggest operators have. Any rational mining operation will respond by playing out the useful life of its existing equipment but withholding new investments. After all, it becomes cheaper and more liquid to acquire BTC by purchasing it outright instead of investing in mining equipment. And purchasing new ASIC miners actually supports the competition—large mining operations with the resources to develop their own ASIC chips. The net result is that only these ASIC developers will have the ability to compete.
This centralization has a second-order effect of making other PoW coins less secure. As mining BTC becomes less profitable, miners point their machines at pools and services that allow rapid chain switching and hashpower rental. (Nicehash is an example.) An abundance of PoW hashpower for rent, however, makes it inexpensive to overpower less valuable chains using the same algorithm (such as Bitcoin’s SHA-256 which is used by many cryptocurrencies) with 51% attacks that can lead to double-spend exploits. We should expect to see attacks on the various other SHA-256 chains after the upcoming halving.
By Douglas Horn, Chief Architect of the Telos Blockchain
