31 Mar 2020

The BCH and BSV Halvings are Coming

Bitcoin Cash and Bitcoin SV will go through their halvings a month prior to Bitcoin’s halving. Arcane Research explores the possible implications of these upcoming halvings.
bch bsv halvings.jpeg
During the next 9 days, the bitcoin forks Bitcoin Cash and Bitcoin SV will have completed their halvings. The mining rewards of the protocols will be reduced from 12.5 to 6.25 BCH/BSV per block. The annual inflation rate will be lowered to 1.8% per year. The effects of the bitcoin halving, which will happen around one month later, have been discussed extensively in the crypto community. Is the halving priced in? What will happen with the hash rate on the network as rewards are cut in half? The upcoming BCH/BSV-halving events may shed some light on what we can expect from the bitcoin halving. At the same time, there are important differences in context (size, value etc) limiting the transferability of insight to bitcoin. Nevertheless, both BCH and BSV are relatively large cryptocurrencies, making their halving events interesting to analyze on a stand alone basis as well.
Why are BCH and BSV ahead of bitcoin?
The bitcoin cash fork of August 2017 included the implementation of a difficulty adjustment algorithm with more adaptive and frequent difficulty adjustments than bitcoin’s difficulty algorithm. This was necessary in order to avoid slow block discovery due to a lower hash rate. However, this algorithm was gamed in the initial months by miners varying their hash rate day by day. This led to some days featuring as little as one generated block per hour, and other days featuring as much as one block generated per minute. This allowed miners to inflate the BCH supply much faster than what was intended in bitcoin, by accelerating the generation of new blocks. This acceleration is the reason behind the early halving of BCH and BSV.In November of 2017, a hard fork was implemented on BCH to solve the difficulty adjustment issues. After this hard fork, the day by day block count has been much more reliable and stable. As shown in the table below, bitcoin has actually had a faster block generation and inflation rate than both BCH and BSV after the fix. Over the last year, bitcoin has had an average time of 9 minutes and 44 seconds between each block, significantly lower than the target of 10 minutes per block. This is the result of growing hash-rate in bitcoin. With difficulty adjustments happening only every 2 weeks (actually every 2016 block), the increase in difficulty has been lagging the growth rate. BCH and BSV on the other hand, with a faster block adjustment based on a moving average of the latest 144 blocks, has had a block production rate much closer to the target of one block every ten minute.
*Nov 15th, 2018 was the day BSV forked from BCH
The expected effects from the BCH and BSV halvings
As the mining reward is halved on Bitcoin Cash and Bitcoin SV we expect some miners to switch over to mining bitcoin. This will happen as the profitability of mining bitcoin will be higher, compared to mining BCH or BSV, all else equal. Mining is a competitive market. The marginal return on mining bitcoin, BCH and BSV should therefore be equal prior to the halving. When rewards are cut in half for BCH and BSV, the profitability of mining those coins are also cut in half, forcing a shift in the market.In order for BCH or BSV mining to stay profitable, the difficulty also have to be halved to counter the reduced reward compared to bitcoin. There will also be an effect of bitcoin difficulty adjusting upwards as more miners start mining BTC. This effect, however, will be small because:
  1. The hash rate devoted to BCH and BSV is very limited compared to bitcoin
  2. The difficulty algorithm of bitcoin will take two weeks to adjust
In other words, there is a real risk that the hash rate might be temporarily halved on both the BSV and BCH networks until the bitcoin halving in May, unless the price of the coins or the transaction fees of the networks increase significantly relative to bitcoin. Although the discussion of “is the halving really priced in” is one that will never settle, it is highly unlikely that the halving will result in a doubling of the price.
Bitcoin dominates sha256-mining
Distribution of hashrate
As shown in the graph above, the bitcoin (BTC) dominance in SHA-256 hash rate is enormous. A temporary miner flight from either BCH or BSV to BTC might have a severe impact on both BSV and BCH, whilst the effect on BTC will be miniscule. A miner flight might make both BCH and BSV more prone to 51% attacks. Right now it only takes a little less than 3% of the total sha256 hash capacity to 51% attack one of the other two blockchains. Right after the halving we might be talking bout as little as 1.5%. This is a big risk to these projects and they might be forced to implement a hard fork to change mining algorithm or consensus mechanism to overcome this. On the positive side, the adaptive difficulty adjustment-algorithm of BSV and BCH should prevent congestions as a result of a sudden drop in hash rate. It should also secure the regular block generation schedule. This might reduce some of the uncertainty held by the holders of BCH and BSV tokens, and might be an advantage for the protocols going into the halving. Nevertheless, we expect volatile days coming into the halving, and in the immediate aftermath.
  • The Bitcoin Cash halving is estimated to happen on the 8th of April, around 17:00 CET
  • The Bitcoin SV halving is estimated to happen on the 10th of April, around 18:00 CET
  • The Bitcoin halving is estimated to happen on the 13th of May, around 20:30 CET
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