Get Rich Quick or Lose Lots of Money? Circle 11 July 2016 In Your Calendar

Do you remember the Millennium bug? What an anti-climax that was!

With Bitcoin mining, many see 11 July 2016 as the day where Bitcoin prices could rocket, and where Bitcoin owners could make a great deal of money. Others see it as the start of a Bitcoin crash. At present no one quite know what way it will go.

Introduction

Just imagine, in these days of minimum wages, it is was announced that in a few months time that you would only get half the pay for your current work? Well, that's what is going to happen with Bitcoin mining, where the expected date for the reward for Bitcoin mining will half. The expected current date is 11 July 2016 [here]:

Nearing the end?

Bitcoin is a cryptocurrency, and uses a distributed approach to its creation and management. No country or single entity can control the creation of Bitcoins, and various parameters have been added to guard against an over supply. It was created by Satoshi Nakamoto (a presumed pseudonym), and borrowed from a whole lot of research methods. 

The algorithm for the creation of Bitcoins thus aims to guard against an over supply, and where a maximum number of coins will be created, and no more after that point. Unlikely cash, which gets lost, a Bitcoin will stay in circulation until it is accidentally deleted (which should be rare). Currently there are around 15.5 million coins that have been created, and the limit is 21 million. We are thus sitting around 73% of all the bitcoins. The natural way to suppress growth is to reduce the rewards for mining the coins.

The current value of a Bitcoin is around $444 with a total market value of nearly seven billion dollars. With around 3,600 coins created every day, the expected halving is predicted to be 11 July 2016.

The mining has generally become more difficult as we near the end of the creation of Bitcoins:

Blockchains

Bitcoins are a cryptocurrency, which has no centralised control. It is a peer-to-peer method in that there is no need for a broker to be involved in the  transfer of bitcoins from one person to another. Each Bitcoin app then contains all of the transactions made on every coin in the world from the start of time of the currency (the "Genesis block") and which is stored as a  blockchain. Currently, as of Oct 2015, the blockchain size is around 65GB, and there are 15 million coins in circulation. Each Bitcoin, itself, will not contain the full ledger.  When a new transaction is created, a new blockchain is added, and every Bitcoin app will update itself.

Bitcoins are not created by any nation, but are "mined" using Bitcoin mining software, and where the miner must create a new block using intensive calculations. Whoever creates this, will win a new bitcoin, and the new block is broadcast to the whole of the network, for Bitcoin app nodes to update their ledgers. This public ledger will be consistent across the whole of the network and store all of the transactions that have been made over the history of the creation of bitcoins. This is equivalent to a bank having the complete record of all the transactions that are made. Each block is like bank statements for each transaction.

Each transaction is added in a sequential order, and each block contains a hash of the previous block, so that the ledger can be proven for all of the transactions. Users have a Bitcoin address thus all transactions can be traced to these addresses, and each blockchain will thus know each user's balance of bitcoins at any point in history.

Mining for profit

The Bitcoin currency has several in-built methods to suppress and over supply of the currency, and to account for increasing computing power. Within the network every transaction is kept in a transaction ledger, and Bitcoin miners compete to produce a new hash for the updated ledger:

In this way we create a challenge for Bitcoin miners to create the new ledger entry with a given hash signature, which has a given number of preceding zeros in the hash value. The winner must then show its working out.

For example if we take "aaa", and we took as hash of it with a counter, and then recompute the hash (SHA-256). This would give us:

"aaa0" fd02fa226acf4c3886bf4..af0e50753e115d8b561
"aaa1" b06e6b02c2d8d8907..e96d191aff73ce5242f428e0d9
"aaa2" 06e703563cdef317eb0d..9d3dcac5e36a7bd3ddc01

So "aaa2" has one leading "0", so, if our challenge was for a hash that has one leading "0",  the node that finds this hash will win, and will have completed the task to create a new ledger entry. 

A bit of history

Few people would have ever predicted the success of bitcoins, and many on-line sites, such as Wikileaks, now accept bitcoins for donations. Its adoption increases by the day, and it has strong support from credible Web server provides, along with being the default currency used by many malware writers. 

Its roots traces back to 2009, when Satoshi Nakamoto created the first Bitcoin specification and proof of concept [here]. He left the project in 2010, and left the code which was accessible for modification and review by developers. The identity of Nakamoto, though, still remains a mystery.

The first signs of interest in bitcoins dates back to 2011 when WeUseCoins published a video based on the technology, and where Douglas Feigelson from BitBills submitted a patent application on the "Creating And Using Digital Currency", and which was contested based on prior art. The growth in Bitcoins has since seen a near exponential growth. 

Up or down?

Many believe that this halving could have a strong effect on the value of Bitcoin, as the mining of them will be more difficult. But could Bitcoins crash, as those who mine them bail-out, leaving the network with a problem in creating new Blockchain entries. The parameters set for the network, and the network itself aims to naturally run out of Bitcoins in the near future.

Economics says that if you reduce supply, with the same demand, the price will increase. In the case of Bitcoins, the supply will not fail, but it is the rate of growth which is likely to reduce. For the price of Bitcoins to increase requires an increase in demand over the increasing supply.

What is likely is that Bitcoin mining will become increasingly centralised, as peripheral miners will exit the market. Those with the largest setup are likely to be able to bare the halving cost, but those with lower scale equipment could decide that it was not economically viable to be involved in Bitcoin mining. This, though, is a paradox, as the more centralised the mining network becomes, the more open it is to attack.

Conclusions

No-one quite knows what will happen, but, recently the price of Litecoin has remained untouched after its halving process [here]. We are thus entering into a new phase of discovery for bitcoins, and no-one can quite predict the route that the prices will go, as some predict an increase in price (due to a slowdown in the growth), while others see a decrease in price (due to reduced demand).