What happens once the mining reward gets cut in half? Sometime around the end of 2012 the mining reward is expected to be cut in half from 50BTC/block to 25BTC/block.

What effect will this have? Doesn't this mean that it will be less economic to run a Bitcoin miner? Will the hashing power be severely reduced? Will BTC prices soar (or alternatively, crash)?
Assuming blocks are solved at the targeted rate of one block every six minutes going forward from today, the date the block block reward subsidy drop will occur happens in late November.


http://www.BitcoinClock.com


Currently the target rate is 7,200 BTC per day.  Starting with block 210,000, this will drop to a targeted rate of 3,600 BTC per day.

This event has been known (and anticipated) since Bitcoin was first released to the world in 2009.

Whether this will cause the exchange rate to rise or fall or the amount of hashing power to rise or fall is mostly speculation.

If investors are counting on the price going up, maybe to $20 let's say, and instead it sticks at around $12, then maybe they sell as it didn't deliver the gains they were hoping for.  So the lowered new supply of coins doesn't necessarily guarantee a corresponding rise in the exchange rate.

The amount of hashing that occurs will roughly approximate miner's profitability.  As long as miners can mine profitably, they will continue to mine.  If their revenue drops by half but it still exceeds the cost of electricity and other operating costs, then they will leave the equipment operating, bringing in mined coins.

Those miners whose costs put them among the least profitable will likely be forced to drop out.  These are those who currently mine with a GPU and pay avergage (e.g., $0.12 per kWh) or above average electric rates.   Unless the future exchange rate rises faster than difficulty from here, come block 210,000, possibly 50% or more of GPU miners will be dropping out -- either immediately if the have done the math, or within weeks when the total revenue calculation for the first month after the drop gets matched up against the monthly electric bill.

FPGA miners operate 5X or more efficiently in terms of electrical consumption so they are still producing positive cash flows and thus most will continue mining even after the drop.