Bitcoin's 2016 Halving: Miner Pay Cut to 12.5 BTC in a Summer of Civil War and Hacks

At 16:46 UTC on 9 July 2016, a Chinese mining pool called F2Pool added block 420,000 to Bitcoin's public ledger. Into the small free-text field that every block carries, it put the pool's Chinese name, which translates as "discus fish", a fish emoji, and a personal message from the Chinese miner Chandler Guo that had nothing to do with money. The block paid F2Pool 12.5 brand-new bitcoin plus 0.58 bitcoin in fees. The block before it, mined by the rival pool AntPool four minutes and twenty seconds earlier, had carried a reward of 25.

That was Bitcoin's second halving. Miners around the world had been sharing about 3,600 new bitcoin a day; from that block on they shared about 1,800. On Bitstamp, one of the oldest bitcoin exchanges (an exchange works like an online broker), bitcoin opened the day at $663.00 and closed at $647.78. At that price, roughly $2.3 million of daily new-coin income became about $1.2 million overnight. Around 15.75 million bitcoin existed, so new supply fell from roughly 8% a year to roughly 4%. Nobody voted on it. The rule had been in the code since 2009.

A pay cut written into the rules

Bitcoin's ledger is kept by "miners", firms running warehouses of specialised computers that compete to add the next page of transactions, a block, about every ten minutes. The winner is paid in new coins plus fees. Every 210,000 blocks, roughly every four years, the new-coin part is cut in half, like a company whose founding charter forces it to issue half as many new shares every four years, whatever the share price does. Most miners join a pool, a syndicate that combines computing power and splits the winnings. The first cut came in November 2012. The second landed in the most crowded summer Bitcoin had yet had.

A network at war with itself

Block 420,000 held 1,257 transactions and weighed 999,838 bytes, a whisker under the one-megabyte limit on every block. That limit was the subject of the block size war. One camp, around the volunteer programmers of Bitcoin Core, the main version of the software, wanted to keep blocks small and squeeze more in through an upgrade called Segregated Witness, or SegWit. The other wanted to simply raise the limit so more payments fit and fees stayed low.

On 10 February 2016 Gavin Andresen, the developer Satoshi Nakamoto had handed the project's lead in 2010, released Bitcoin Classic, a rival version that doubled the limit to two megabytes. Coinbase, the largest US exchange, backed it. Its chief executive, Brian Armstrong, told reporters: "We're not going to split in two, we're going to upgrade." Classic needed miners producing 75% of recent blocks to switch on. It never came close.

The miners chose in Hong Kong instead. On 20 February, at the Cyberport business park, Core developers including Matt Corallo and Luke Dashjr, and Adam Back, president of the company Blockstream, sat down with Jihan Wu of Bitmain, the largest maker of mining machines, Kevin Pan of AntPool, Wang Chun of F2Pool, and Bobby Lee and Samson Mow of the exchange BTCC. The meeting ran about 19 hours and ended near 4 am on 21 February. The organisers said the pools in the room controlled more than 85% of the network's computing power.

The deal resembled a handshake between a company's management and its biggest shareholders, with nothing binding behind it. Miners would keep running Core. SegWit would ship around April 2016, and the developers who signed would propose code to raise the limit to about two megabytes within three months after that, for activation around July 2017. On halving day SegWit had still not shipped. It arrived in Bitcoin Core 0.13.1 on 27 October 2016. The two-megabyte code never made it into Core.

The Chinese pools and the ten-minute clock

The blocks on either side of the halving tell the story of who ran the network. AntPool belonged to Bitmain. F2Pool, co-founded by Wang Chun, had about 23% of the world's mining power in January 2016, Bitcoin Magazine reported, and CoinDesk put AntPool and F2Pool at roughly a quarter each early that year. Both were Chinese, as were BTCC and HaoBTC.

Before the halving, some analysts predicted a wave of machines switching off. Arthur Hayes, chief executive of the futures exchange BitMEX, told CoinDesk his baseline was that the halving would have "zero effect" on the price. Marco Streng, chief executive of Genesis Mining, said afterwards: "If you are the most efficient miner you will be able to continue mining."

The machines mostly kept running. CoinDesk estimated computing power dipped from about 1,600 to under 1,400 petahashes per second, within normal swings. Bitcoin's built-in thermostat, the difficulty adjustment, resets the puzzle every 2,016 blocks so blocks keep coming every ten minutes. Block data show it rose 0.04% on 18 July, fell 5.4% on 2 August, then rose 7.7% on 15 August as miners came back.

The same summer on Ethereum

Bitcoin's newest rival was having a worse time. The DAO, an investment fund run entirely by a smart contract (code that moves money by itself, like a vending machine) on the Ethereum network, was drained on 17 June 2016. The attacker took about 3.6 million ether, roughly $50 million to $60 million at the time. A day later bitcoin touched $778.85 on Bitstamp, its highest since February 2014, the month Mt. Gox collapsed. By 22 June it had fallen as low as $588.03, with the UK's Brexit vote a day away.

On 20 July, eleven days after the halving, Ethereum's developers and users rewrote their own rules with a "hard fork" at block 1,920,000, an emergency rule change that moved the stolen ether back. A minority refused and kept the original chain alive as Ethereum Classic. Chandler Guo, the miner named in block 420,000, then announced that he and other miners would attack Ethereum Classic with their machines, according to Forklog and CCN. He later changed his mind. Both sides of Bitcoin's block size fight read the episode as a warning about who really controls a chain.

Bitfinex, then the boom

On 2 August 2016 Bitfinex, a Hong Kong exchange and one of the busiest dollar markets for bitcoin, was robbed. A hacker sent more than 2,000 unauthorised transactions and took 119,756 bitcoin, about $72 million. Bitcoin opened that day on Bitstamp at $606.84 and fell as low as $465.28, a 23% drop, before closing at $540.

Bitfinex did not leave the losses with the hacked accounts. It cut every customer's balance by 36.067% and handed out BFX tokens, IOUs worth $1 each, much as a failing bank might convert part of every deposit into bonds. On 3 April 2017 it redeemed every outstanding BFX token at $1. Customers were repaid in dollars at August 2016 prices, not in bitcoin.

Then the price did what halving believers expected. Bitstamp's monthly closes run $570.75 in August 2016, $966.30 in December, $2,298 in May 2017, $4,734 in August and $9,948 in November. On 17 December 2017 bitcoin touched $19,666, about 30 times its halving-day close, on the day CME Group launched bitcoin futures. It ended the year at $13,880. The block size war ended that summer too: the big-block camp split off as Bitcoin Cash on 1 August 2017, and SegWit activated on 24 August.

©CMZ chart. Data: Bitstamp

Supporters credit the halving. Sceptics point to the 2017 craze for new tokens sold on Ethereum and to the arrival of Wall Street futures. With two halvings on record by then, neither side could prove anything.