How Bitcoin Cash mining tax will affect Bitcoin halving

By Will Heasman

A bitcoin mining magnate has proposed a new development fund for Bitcoin Cash. According to BTC.TOP CEO Jiang Zhuoer, the scheme will 'tax' Bitcoin Cash mining rewards in an effort to increase funding for Bitcoin Cash infrastructure. 

However, Zhuoer believes this will influence Bitcoin (BTC) as well. With an impending drop in BCH hash rate, Bitcoin will incorporate the load, increasing network difficulty, and reducing miner profitability. So with the Bitcoin halving less than four months away, how much impact will this have? 

The basis for the latest Bitcoin Cash infrastructure funding plan is that developers can’t work for free. The proposal blames "free riders" in the BCH community, coupled with "undue influence" from corporate donors.

Four of the biggest mining pools, including Bitcoin.com, BTC.Top, ViaBTC as well as Antpool, and BTC.com support the plan. If all goes ahead, 12.5% of BCH mining rewards will be siphoned from the network and deposited into a Hong Kong-based development fund. This will start on May 2020 and last for six months.

Zhuoer points out the new taxes will make the Bitcoin Cash network less profitable to mine. He argues that, as a result, it might push miners away onto other networks, such as Bitcoin.

With a back-of-the-envelope calculation, he estimates that the mining taxes might result in a corresponding 12.5% drop in hash rate—the amount of mining power on the network. 

"The BCH hash rate will be diminished by 12.5%, but BTC mining will bear 97% of the cost of the diminished profitability, because there will be more hash competing for the same BTC rewards," Zhuoer suggests.

How will this affect the Bitcoin halving?

This could make the Bitcoin network less profitable to mine because of the increased competition. (It’s a zero sum game, the more miners, the less for everyone). And it couldn’t come at a worse time.

In May, Bitcoin is set to undergo its halving event. This is where the new supply of Bitcoin gets cut in half. In theory, this initially reduces the revenue of Bitcoin miners on average, by 50%. However, two things might happen. Less profitable miners might drop off the network, reducing the pain for other miners. And fees might rise, compensating the miners for keeping the network running.

So, with the Bitcoin network about to make life difficult for miners—this Bitcoin Cash mining tax could make things worse. But, it’s only adding insult to injury since the halving will have a much bigger effect.

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