Every 4 years, bitcoin experiences a pivotal event known as “Bitcoin halving“, which means halving the block reward. This first happened in 2012 and again in 2016. Likewise, it will happen again in 2020 and 2024.
So, what is Bitcoin halving? What impact does it have on the price of bitcoin? In this article, we will talk about what the bitcoin halving is and why it is so important for bitcoin.
Understanding Bitcoin Mining Rewards
Every day, many thousands of watts of electricity are used for bitcoin mining. People mine bitcoins because they hope to earn bitcoins, which have value and can be bought and sold in a variety of markets.
Without going into details, mining is the process by which the network is secured and transactions are processed. To incentivize people to mine bitcoin (or other cryptocurrencies that also use Proof of work), each block contains a reward. That reward is released to the miner who successfully solves the block. This reward needs to be high enough to be a strong motivator. But the rewards can’t be too much either. A large reward will cause an oversupply and reduce the value of the currency.
What is Bitcoin Halving?
When Satoshi Nakamoto created bitcoin, he wanted to create a system that would be self-sustaining and would in some way simulate gold mining. Over time, mining will become more difficult and the rewards obtained will gradually decrease to control the supply. Specifically, Nakamoto writes:
“The steady addition of a constant amount of new coins is similar to gold miners expending resources to add gold to circulation. In our case it was CPU time and electricity used.”
Nakamoto’s solution to this problem is to set up a system that halves the number of bitcoins born in a block after each halving. When bitcoin starts, after 10 minutes a block is born, the block reward is 50 bitcoins.
Every 210,000 blocks (or about four years, given 10 minutes per block) this reward is halved. After the last two bitcoin halvings, the current block reward is 12.5 bitcoins. In 2020, it will be 6.25, etc
In this way, the halving of bitcoin rewards after each block, has a number of significant effects on the network.
First, it prolongs the life of the reward system. If we were still releasing 50 bitcoins every 10 minutes, then we would reach the maximum supply of 21 million bitcoins pretty quickly. In fact, mining rewards will end after about 8 years. The slow decrease in the reward ratio over time means that there will be a longer period during which mining leads to the receipt of the block reward.
Second, the bitcoin halving gives bitcoin a steady increase in price over time. This is because the number of new bitcoins appearing each year will decrease. This limited supply causes the price of bitcoins to rise, as their scarcity also increases proportionally.
Ultimately, the bitcoin halving increases the cost of mining each individual bitcoin. As the network difficulty (diff) increases over time and the reward ratio decreases, the actual mining cost of each bitcoin increases, which in turn causes the transaction price of each bitcoin to increase as well.
Learn more about: What is the difficulty ( diff ) ?
Bitcoin Halving Process.
Bitcoin Halving #1: From January 3, 2009 to November 28, 2012, there were 10,500,000 BTC created, which is an average of 50 BTC every 10 minutes.
Bitcoin Halving #2: From November 28, 2012 to July 9, 2016, there were 5,250,000 BTC created, which is an average of 25 BTC every 10 minutes.
Bitcoin Halving #3: From July 9, 2016 to mid-2020, there will be 2,625,000 BTC created, which is 12.5 BTC every 10 minutes on average.
Bitcoin Halving #4: And from 2020 to 2024, there will be 1,312,500 BTC created, which means that every 10 minutes on average, only 6.25 BTC will be mined.
Bitcoin Halving #64: no more Bitcoins will be mined.
The latest halving is coming soon, scheduled for May 21, 2020, you can see the countdown date of Bitcoin halving here.
Miners’ Future When Halving Happens
When the halving occurs, miners will only receive half the reward for mining Bitcoin. If the reward is lower, this could deter many Bitcoin miners. Logically, it seems that as the difficulty of mining increases, the processing speed of transactions slows down, because fewer miners will continue to maintain this work.
However, the Bitcoin network is capable of rebalancing itself.
Although Bitcoin has also experienced Downtrend cycles in the past, Bitcoin Hash Rate is continuously increasing as shown below (https://www.blockchain.com/en/charts/hash-rate)
Miners say they are willing to maintain or increase computing power after the event. All carry a belief that the Bitcoin price will increase and compensate for the decrease in block rewards.
According to Charles Hayter, CEO of Crypto Compare, there will be a wave of expulsion of old miners in the near future, despite technological improvements to produce miners with higher performance and better prices. And then if the Bitcoin price rises well enough, more new miners will enter the market.
Mining stop date
With this in mind, this leads us to a reasonable question. What happens when bitcoin rewards go down? Will everyone simultaneously stop mining bitcoin, bringing the network to a complete halt?
To address this concern, we must consider a few different things.
First, given the current mining rate and factoring in future bitcoin halving events, it is estimated that the last block containing bitcoins will be mined around the year 2140. Considering that the network starts started operating in 2009, this means the network will have a total of about 130 years before this event occurs. At that point, the economic conditions of cryptocurrencies may be so fundamentally different that the need for block rewards may be non-existent.
The second thing to consider is that bitcoin miners have a secondary source of income beyond the block reward. Specifically, miners also earn transaction fees. Every day, hundreds or even thousands of bitcoins are paid in transaction fees (depending on network conditions). So by the time 2140, it is entirely possible that mining purely for transaction fees could be profitable enough for miners to continue mining indefinitely, regardless of whether they are no longer a block reward. . In his whitepaper, Nakamoto describes it like this:
Once a predetermined amount of money has been put into circulation, the incentive is fully convertible to transaction fees and completely free of inflation.
Another point to consider is the release of new projects that plan to coexist alongside the bitcoin blockchain.
What Bitcoin Halving Means for Bitcoin Price
With all of that in mind, let’s take a quick look at what the bitcoin halving actually means for bitcoin. First and foremost, it is a means of controlling the amount of new bitcoin entering the market each day. It was intended as a way to prevent hyperinflation from occurring.
If we look at countries that have experienced hyperinflation, one thing that often happens is that new money printing is rampant and uncontrolled. Every time a country prints more money, it reduces the value of each individual currency in circulation. The bitcoin halving ensures that not only will the rampant production of new coins ever happen, but in fact, mathematically required, the opposite will happen.
The bitcoin halving is also intended to simulate gold mining, as gold mining will inevitably become more expensive and difficult over time, as more and more of the earth’s gold reserves are mined. Not only is it more expensive, but less new gold enters the gold market each year. This has resulted in a predictable and steady rise in the price of gold over the past century.
In addition to Bitcoin, most coins use algorithms proof of work also uses the halving as a way to increase its price.
For example, Vertcoin recently experienced its own halving event, as did Ethereum Classic, which reduced the reward from 5 ETC to 4ETC. Litecoin Halving on August 26, 2015, Litecoin block reward halving for the first time, with Litecoin production per block dropping from 50 lTC to 25LTC. While other cryptocurrencies like Ethereum do not have a similar supply reduction model, they use their own methods of ensuring that the number of new tokens hitting the market each year is gradually decreasing.
Many bitcoin enthusiasts firmly believe that the halving will have an incredibly positive impact on the bitcoin price, and it is true that the bitcoin price has risen quite dramatically in the weeks leading up to the block reward halving.
The first halving took place on November 28, 2012, and it doesn’t seem to have much effect on the price – at least not immediately. Of course, the bitcoin price was also under $15 at the time, so it was a completely different environment. The price started skyrocketing in mid-January 2013. For the second time in 2016, BTC broke $1,000 for the first time late in the year after starting 2016 at $430. The same could be true for the next bearish event in 2020, most price predictions agree on a trend reversal by the end of 2019, so this would be a good time to accumulate. accumulated.
It is unclear whether the market is already priced in the upcoming halving event, 2020. Either way, it will be fascinating to see how the halving affects both the price and the bitcoin mining community.
Ultimately, the bitcoin halving keeps the bitcoin price consistently going up in the long run. If it weren’t for the bitcoin halving, bitcoin today might be worth only $50 or hundred dollars per coin instead of the thousands it’s worth today.
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