Source: iStock/ranplett

Bitcoin (BTC) is the most secure cryptocurrency with the most secure blockchain, remind the legions of Bitcoiners who argue that the cryptocurrency’s increasing hashrate is enough to ensure that it never succumbs to a 51% attack.

However, skeptics argue that Bitcoin’s halving block rewards put this much-fabled security at risk. By reducing the quantity of new BTC given to those who mine the cryptocurrency, there will be less financial incentive to maintain the Bitcoin network’s high hashrate, in theory making 51% attacks more feasible.

Nonetheless, other commentators believe that the increasing value of transaction fees will be enough to ensure Bitcoin’s security. Because even with declining (or non-existent) block rewards, Bitcoin’s rising value and adoption would mean that the rewards accruing from transaction fees will incentivize mining, they say.

The pessimistic view of Bitcoin security

It’s already common knowledge that Bitcoin’s next halving will take place this May, when the reward for being the first to confirm a block will be reduced from BTC 12.5 to 6.25. After this, the next halving will take place after another 210,000 blocks have been mined, and so on, until Bitcoin’s supply cap of BTC 21 million has been reached in around 120 years.

The next three halvings will reduce the block rewards down to BTC 3.125, 1.56250000 and then 0.78125000. According to Emin Gün Sirer, CEO of AVA Labs, the developer of the AVA blockchain, such reductions will be enough to seriously weaken Bitcoin’s security.

“As the amount of awards given to the miners dwindles down, the security of the network will drop,” he says. “If the security drops sufficiently, we may even see massive double-spend attacks targeting exchanges. This would, in turn, trigger exchanges to extend their confirmation times. At some point, the attackers might have access to so much hashpower that no reasonable number of confirmations may be sufficient to guarantee security.”

Sirer adds, “I give Bitcoin at most 3 more halvings, that is 12 years, before the rewards given to the miners drop to the point where intervention is necessary.”

As reported, he argues that removing Bitcoin’s supply cap would solve this.

The optimistic view of Bitcoin security

On the face of it, Sirer’s argument looks plausible – block rewards are unquestionably getting lower, and after 30 halvings they will be reduced to nothing.

Watch the latest reports by Block TV.

Still, other people in the industry argue that transaction fees will be more than enough to incentivize Bitcoin mining. Kraken‘s director of business development, Dan Held, is one of these.

“As we’ve seen Bitcoin’s subsidy decrease dramatically through halvenings, we’ve seen the block reward [new BTC and transaction fees] grow to exponentially higher levels,” he tells Cryptonews.com.

“And as the block reward value grew massively, we’ve seen transaction fees as a percentage of the block reward continue to grow as well, demonstrating that long term security should be fine with only transaction fees.”

By both “block reward,” Held is referring to newly minted BTC and transaction fees. And according to data from Coin Metrics, the amount paid daily in USD in transactions has been rising over the long term.

Source: Coin Metrics

As reported, Bitcoin all-time cumulative transaction fees hit a symbolic amount of USD 1 billion recently. At the same time, Bitcoin all-time miner revenue (transaction fees plus block rewards) reached USD 15 billion.

In July 2016 (when the previous halving took place), the total value of all Bitcoin transactions for a single day of confirmations was only USD 30,700. On March 12, 2020, this figure was roughly USD 192,200. However, it’s still small compared with block rewards.

Miners Revenue

Total value of coinbase block rewards and transaction fees paid to miners.

Source: Blockchain.com

So block rewards are still highly important to miners, but the point is that transaction fees as a percentage of total block rewards are growing, as Dan Held suggests. Moreover, if Bitcoin gains wider adoption, and if its price rises, the value of fees will increase.

George Agathangelou, the chief marketing officer at blockchain credential firm Block.co, agrees with Held’s analysis. He believes that Bitcoin’s hashrate will continue to rise even with declining block rewards.

“In my view, the long-term reduction in block rewards will not undermine Bitcoin’s security if the current trend in the Bitcoin hashrate continues to rise,” he tells Cryptonews.com.

“We do notice that significant investments in mining farms are being allocated around the world, while at the same time the hardware performance of mining rigs is also increasing. As a result, I would expect that the hashrate will continue to rise in the future and that Bitcoin’s security will keep on rising despite the block rewards reduction.”

Meanwhile, Bitcoin educator Andreas Antonopoulos stressed on multiple occasions that even if the number of miners would drop by 50%, the miners who stick around and wait for the mining difficulty re-targeting, would be twice as profitable afterwards: “That is a pretty good incentive to stick around.”

[embedded content]

Also, according to Antonopoulos, ”Bitcoin could run today with one-tenth of the mining power and be very very secure without any problems.”

“How do I know? Well, we had one-tenth of the mining power year and a half ago. It was very very secure then. So nothing really happens when the block subsidy runs out, nothing really happens when the halving happens, nothing happens if a bunch of miners turn off their equipment other than a slight delay in block issuance which then gets adjusted in less than two weeks. This is a dynamic system that is constantly adapting to change,” he said at the end of 2019.

[embedded content]

Bitcoin mining profitability vs. hashrate

Source: bitinfocharts.com

Some miners will drop out. The hashrate goes down. Difficulty adjusts, making it easier for new miners to enter the… https://t.co/kflH2M0D3m — Mati Greenspan (tweets are not trading advice) (@MatiGreenspan)

Adoption = Security

The bottom line is that, if Bitcoin continues to enjoy increasing adoption, its security will rise in parallel. If not, it may be in trouble.

As Dan Held explains, fees are “directionally proportional to both the value of the network and usage. In other words, the block reward [newly minted BTC and fees] equilibrates towards adoption. There isn’t a situation in which there is a disconnect as participants in this game are only financially incentivized (there is no altruism).”

George Agathangelou agrees. “As long the price of bitcoin is above the average cost to mine a bitcoin, there will always be incentives to enter the market as a miner.”

___

Mining hardware break-even price

The break-even pice is based on an assumed USD 0.05/kWh electricity cost. Data was recorded at March 09, 11:00 UTC (USD 7,870 per bitcoin). Source: f2pool. On March 15, BTC trades at c. USD 5,282 (08:27 UTC)Source