Could Bitcoin’s triumph lead to its downfall?

With the upcoming fourth Bitcoin (BTC) halving on the horizon, there is growing concern among experts that the event could potentially lead to centralization risks, which could pose a threat to the blockchain network.

The halving occurs once every four years and involves cutting the block reward for Bitcoin miners in half. This is done to maintain the scarcity of the asset. In the past, miners have continued to operate and even increased in number following the compensation cuts, thanks to the rising price of BTC.

However, there are now concerns about whether the current BTC price is high enough to incentivize miners to remain operational, or if centralization and existential risks will become more prominent after the fourth halving event.

Lani Dizon, co-founder of Ryo Coin, believes that market dynamics can change and unforeseen events can have significant impacts. She acknowledges that while some miners may find the reduced block reward challenging, especially if the price does not immediately or sufficiently increase to offset the reduction in rewards, she emphasizes that the Bitcoin network is designed to adjust accordingly.

One of the main concerns surrounding the centralization of Bitcoin is the compensation of miners who help keep the network operational. As the block reward is set to reduce by 50% in the upcoming halving, from 6.25 BTC to 3.125 BTC, the high price volatility of Bitcoin could make it more difficult for individual miners to be adequately compensated to operate their nodes under challenging conditions.

Looking back at the previous halving events, it can be observed that the BTC price reached new all-time highs approximately a year or 18 months after each halving. The price of Bitcoin was trading at $12.35 during the first halving in 2012 and surged to $964 a year later. Similarly, during the second halving in 2016, the price increased from $663 to $2,500 in around one year. Following the third halving in 2020, Bitcoin was trading at around $8,500 and reached nearly $69,000 in just 17 months.

Lucian Calin, a data center technician at Argo Blockchain, acknowledges that some over-leveraged miners may not survive the halving due to high overhead costs or significant debts. However, he believes that overall, the situation will eventually balance out.

The reduction in Bitcoin’s block reward through halving could put strain on small-scale and individual miners due to the high costs associated with mining. Smaller miners might exit the market if they lack sufficient resources, potentially favoring larger mining companies and leading to more centralized control over the network.

This increased centralization could pose a significant threat to the global financial system, particularly with BTC exchange-traded funds (ETFs) registering over $11.2 billion in total net flows.

There is a concern that such centralization could expose the Bitcoin network to a 51% attack and potentially allow a single entity to have full control over the blockchain. The Foundry USA Pool, for example, currently controls 27% of the total Bitcoin hashrate.

However, Lani Dizon asserts that Bitcoin’s decentralized nature is designed to prevent any single entity from controlling it. The network relies on a proof-of-work (PoW) consensus mechanism, where miners compete to validate transactions and secure the network.

Lucian Calin argues that with the current ETF from BlackRock and other major institutions, there may be attempts to take over Bitcoin and make it more centralized. However, he believes that this would only be possible if the price of Bitcoin reaches “millions of dollars,” as there is a limited number of coins available on exchanges.

Bitfinex crypto exchange released a report suggesting that the forthcoming Bitcoin halving could result in the centralization of BTC mining power, which could lead to vulnerabilities and censorship contrary to Bitcoin’s ethos.

The U.S. currently holds a 37.84% share of the total BTC hash rate, with a total hash power of 226.61 EH/s.

While concerns about Bitcoin’s centralization persist, the global distribution of miners and their ability to adapt help mitigate the risk, ensuring that the network remains decentralized.

Christopher James Crowell, a Bitcoin miner and director of business development at Canaan, believes that Bitcoin mining is a global phenomenon that cannot be controlled by a central entity.

If centralization were to occur, there are differing opinions on how governments would react. Dizon suggests that governments would view any attempt to control Bitcoin by a single entity as a significant threat to financial stability and would likely take regulatory actions to address the concentration of power. On the other hand, Calin argues that governments would have limited power due to the international nature of Bitcoin.