What is the Bitcoin halving?

By January 28, 2020 Bitcoin Business
Click here to view original web page at decrypt.co

There’s only one Mona Lisa, only so many Picassos, a limited supply of gold on Earth. The inventor of Bitcoin believed scarcity could create value where there was none before. The Halving also known as the Halvening is due to occur sometime in May 2020. To understand it, we must understand the theory behind Bitcoin’s supply. Below we explore more.

Bitcoin is revolutionary because it proved–for the first time–how something that was completely digital could be scarce. This limited supply is one of the primary reasons the price of Bitcoin has gone from being worth nothing 10 years ago to being priced at $20,000 per coin at its peak.

Fiat currencies such as the U.S. dollar were initially created with firm rules–to create one U.S. dollar, the U.S. government needed to have a certain amount of gold in their reserves. This was known as the gold standard. Over time, these rules eroded as modernizing economies, during bouts of extreme financial certainty–like the Great Depression and World War II–printed more money to help stimulate struggling economies. This change in tac is precisely the kind of thing Satoshi Nakamoto wanted to avoid. He/she/they had seen that this devaluation of fiat money could have disastrous effects, and so, with code, prevented any single party to be able to print more Bitcoin.

The Bitcoin code is embedded with a hard supply limit of 21 million coins. New Bitcoin is created through mining as block rewards. Miners do the work of maintaining and securing the Bitcoin ledger and as a reward; the system sends them new Bitcoin.

However, about every four years, the mining reward is halved–hence “the Halving.” Each halving reduces the rate of new Bitcoin entering into the supply until no more new Bitcoins are created at all in the year 2140.

The Halving was programmed into Bitcoin’s code by Satoshi Nakamoto. This extremely simple mechanism of reducing the total supply over time is one of the main reasons why Bitcoin is the world’s most valuable crypto asset. As Nakamoto wrote in the Bitcoin whitepaper: “the network is robust in its unstructured simplicity.”

The first million Bitcoins were mined by Satoshi Nakamoto 10 years ago. Since then, about 85% of the total supply has been mined and only about 3 million more Bitcoins will ever be created.

  • 2009 – Bitcoin mining rewards start at 50 BTC per block
  • 2012 – The first Bitcoin Halving reduces mining rewards to 25 BTC
  • 2016 – In the second Halving, mining rewards go down to 12.5 BTC
  • 2140 – The 64th and last Halving occurs and no new Bitcoin will ever be created

What’s so special about it?

If a person, group, or government is trusted to set up the money supply, they must also be trusted to not mess with it. Bitcoin is supposed to be decentralized and trustless–no one in control and no one to trust. Since Bitcoin is not controlled by any one person or group, there must be hard-set rules about how many Bitcoin gets created and how they are released.

By writing a total supply and Halving event into the Bitcoin code, the monetary system of Bitcoin is essentially set in stone and practically impossible to change. This “hard cap” means Bitcoin is a kind of “hard money” like gold, which has a total supply that is also practically impossible to change.

What happens to miners?

Miners must use precious resources to maintain the Bitcoin network, but what happens when their rewards are halved? Since the Halving reduces mining rewards, the incentive for miners to work on the Bitcoin network would also be reduced over time, which would mean fewer miners and less security for the network. In order to compensate miners properly into the future, the price of Bitcoin or the transaction fees must go up to meet miner’s demands.

How do you take advantage of the Halving?

According to the laws of supply and demand, the dwindling Bitcoin supply will inevitably lead to increasing Bitcoin demand, leading to a rise in prices. The best way to take advantage of this is of course by buying Bitcoin. As the leading and most popular crypto asset, Bitcoin can be easily purchased on nearly any crypto exchange as well as mainstream products such as the Cash App. Historically, after previous halving events, the price of Bitcoin did go up, but not necessarily straight away. Many Bitcoin watchers are hoping the same happens again.

The Halving may have a huge impact on Bitcoin’s price according to some “experts.” Cryptocurrency-focused research company, Digital Asset Research created a prediction model setting Bitcoin at over $60,000 after the next Halving in May 2020. A German bank went even further and predicted a price of $90,000 per Bitcoin after May 2020. But the truth is, no one knows for sure.

It has been argued that since the Halving is well-known and highly predictable, the event has already been calculated into Bitcoin’s price by most investors.

Disclaimer: This is definitely not investment advice. Please do your own research and don’t believe everything you read on the internet.

Leave a Reply