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Bitcoin Economy Braces for Disruption from 'Mining' Milestone

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The first considerable change for the Bitcoin market nears — the date when rewards for 'mining' the digital currency drop from 50 to 25 bitcoins per block generated.

There are two ways to obtain bitcoins, a digital alternative to cash. The easiest is to buy from a Bitcoin exchange, much like many people exchange U.S. dollars for foreign currency. People with sophisticated computer hardware have the more lucrative option of 'mining' the currency, which means they obtain new bitcoins as they are generated and verify their uniqueness to put them into circulation.

Without miners, transactions could not be processed, so in essence miners are like bank servers, says Jon Holmquist, head of marketing at Coinabul, a company that exchanges bitcoins for gold and silver. Because of their integral work, miners receive rewards and have a large say in protocol changes.

Like the clock on a Hollywood time machine, the countdown for this transition moves at unpredictable and inconsistent speeds. As of Nov. 7, the countdown clock stands at between 21 and 22 days, though the target date could deviate every time a new bitcoin block is put into circulation. 

“Anyone who is mining after the reward drop will receive less for their efforts than they do now,” says Roman Shtylman, founder of BitFloor, an online bitcoin exchange.

The reward to miners is set to halve every four years. The schedule could be altered if 51% of users agree to the change, but that is unlikely, says Holmquist.

Some people say the change will force many Bitcoin miners out of the market, since the reward would no longer be worth the time they invest. In turn, miners would have to liquidate the coins they’ve saved.

Others see the reduced supply of bitcoin having the opposite effect of driving up the value of each bitcoin.

“This could be seen as requiring a longer timeframe to recover initial mining costs and may keep some people from jumping in as eagerly,” Shtylman says. “But I don't expect current miners to drop out.”

With the gradual phase-out of block rewards and more people using the currency over the next few years, transaction fees will create a new reward to keep miners in the system.

Only a fixed number of bitcoins is ever going to exist. The system was established with a 21 million bitcoin limit, which will be reached by 2140.

Bitcoin is already a niche currency, appealing to those who want a digital payment method that has many of the qualities of cash, such as anonymity and the inability to perform chargebacks.

Decreasing mining rewards “might harm Bitcoin in a way because it’ll be less marketable to the niches it already occupies,” Holmquist says.

Several companies are working to make Bitcoin more accessible to both casual and heavily-invested users. BitInstant plans a debit card that lets consumers spend bitcoins at merchants that accept conventional payment cards, whereas Butterfly Labs Inc. is creating specialized hardware to facilitate Bitcoin mining.

“From this point on, it’s just about building infrastructure and getting more people involved … but there’s an opportunity for another company to create something similar to Bitcoin that’s more user friendly and better for daily use,” Holmquist says.

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