What Is the Bitcoin Halving and How Will It Affect You?

Bitcoin Halving

May 12, 2020, 07:30:12 UTC – At this time (or some time incredibly close to it), Bitcoin’s mining reward will drop from its current value of 12.5 BTC to 6.25 BTC per new block. Coined, the halving, this event is a core part of the Bitcoin code and is scheduled to occur multiple times throughout Bitcoin’s existence.

1. How does the Bitcoin halving work?

For those who may not know, or those who need a refresher, new bitcoins enter circulation via mining reward in a process called Proof-of-Work. A mining reward is effectively a form of bitcoin payment that miners receive for facilitating transactions on the Bitcoin network. Because bitcoins have monetary value, it provides miners the incentive to churn out the electricity and computing power the Bitcoin network needs to exist.

To simplify this concept, you can think of bitcoin mining as similar to mining for gold. A halving is simply an event in which Bitcoin’s inflation rate (i.e., the production rate) is cut in half.

Bitcoin Inflation vs Time

Bitcoin’s inflation is completely predictable, as it follows a hard-coded schedule. | Source: Bitcoin Block Reward Halving Countdown

This Bitcoin halving isn’t our first, and it won’t be our last either. Bitcoin first launched in 2009 with a mining reward of 50 BTC per new block. Since then, there have been two halving events in which the mining reward dropped to 25 BTC and 12.5 BTC (its current level), subsequently.

Bitcoin’s mining reward will continue to fall by 50 percent every 210,000 blocks (about every four years) until the total number of bitcoins in circulation reaches 21,000,000. Therefore, the last halving will happen sometime in 2140.

2. What is the purpose of the halving?

To understand the purpose of the halving, it’s vital to know the motivations of Satoshi Nakamoto (Bitcoin’s elusive inventor) in creating Bitcoin. Although Satoshi’s identity is shrouded in mystery, we can get some idea of his rationale through old forum posts, emails, and even the Bitcoin code itself.

Looking at one of Satoshi’s earliest online appearances, he (or she) states,

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

Satoshi is, of course, speaking about the multiple times throughout history in which central banks have debased a country’s currency through hyperinflation or other means. Germany after World War I, Zimbabwe during the mid-2000s, and most recently, Venezuela all serve as excellent examples of detrimental hyperinflation.

In an even earlier email, Satoshi explains the reasoning further,

“The fact that new [bitcoin] coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase.

Coins have to get initially distributed somehow, and a constant rate seems like the best formula.”

Once again, Satoshi makes it clear that Bitcoin’s predictable inflation is meant to build trust through technology and prevent a central entity from selfishly debasing the currency.

The most notable evidence pointing to this reasoning, however, is a reference to a headline in The Times that Satoshi included in the raw data of Bitcoin’s genesis (first) block.

The Times

Satoshi Nakamoto’s reference to the British government’s failed bailout attempt implies a disdain for the “too big to fail” attitude of banks during the 2008 financial crisis. | Source: Genesis Block Newspaper

While there are several ways in which the Bitcoin network attempts to improve upon the traditional financial system, it’s evident through Satoshi’s writings that its inflationary mechanism, which includes the halvings, is one of the most prevalent.

3. What impact will the upcoming halving have on the cryptocurrency market?

If you’re a cryptocurrency trader, we’ve got some good news for you. Almost immediately after Bitcoin’s two previous halvings, the bitcoin price experienced significant increases.

The first halving occurred on November 28, 2012, and was immediately followed by a meteoric rise in price the following year. During this time, the Bitcoin price grew from less than $20 to over $1,000, bringing hodlers an annual return of 8,000 percent.

The second halving, on July 9, 2016, saw similar results. A year after Bitcoin’s second halving, the price had increased over 280 percent, and it continued to grow to reach its all-time high of ~$20,000 at the end of 2017.

Halving - Bitcoin Price

The two previous halvings have been followed by subsequent bull-runs. | Source: CoinDesk 2020 Bitcoin Halving Research Report

You should note, though, that past results don’t guarantee that the same outcome will happen again in the future.

Bitcoin’s upcoming halving is occurring during a period of widespread economic instability. Due to COVID-19, much of the global economy has come to a stand-still, and we’re uncertain about when things will be back to normal. Many people are currently keeping their wealth in the form of cash, waiting until the economy is back on track.

It’s Economics 101. Once the halving occurs in May, the rate at which the supply of bitcoins enters circulation will decrease. With less supply-side pressure and equal or, hopefully, increased demand, the bitcoin price should rise.

Typically, a government body creates the specifications regarding the carbon credits and hands them out to companies within its jurisdiction. If a business produces more CO2 than their carbon credits allow, then it needs to purchase additional ones from organizations which have an excess number or otherwise face hefty fines.

How about miners and everyone else?

In this area, predictions get a little dicier. A drop in the mining rewards due to the halving will inevitably lead to a fall in mining revenue. Although large mining pools, operating with efficient miners and low-cost electricity, can likely take the hit, small-scale retail miners may run into issues.

To recoup some of this lost revenue, it’s possible that miners will begin to only accept transactions with increased transaction fees. For the average Bitcoin user, doing so could lead to more expensive transactions, which may, in turn, limit Bitcoin’s use.

4. However, only two things in life are certain…

Death and taxes. Looking at our current situation and the previous halvings, we can make educated predictions about the outcome of the halving event up next. But the actual results are anyone’s guess.

Miner’s could have a breakthrough in energy efficiency. The current bitcoin price may already have the event “priced in.” Or the Lightning Network could see a boom in adoption. All of these indirect influences could become a factor.

No matter what happens, though, you should view May 12’s halving in a positive light. It truly is a testament to just how far Bitcoin has come.

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