|Bitcoin Halving: What does it mean?
In 2012 and 2016, Bitcoin went through a halving event, and 2020 is set to be no different.
On respective dates within November 2012 and July 2016, Bitcoin went through a “halving” – where Bitcoin’s inflation rate is reduced by 50%. The block reward will drop from 12.5 to 6.25 Bitcoins per block mined.
To fully understand the implications of this, there are quite a number of things to be aware of – more specifically the mining process and the way that the network operates.
Bitcoin mining and physical mining might on the face of it seem completely separate but there are similarities between Bitcoin mining and precious metals like gold. Both are done to earn a reward and both are intensive. Bitcoin mining is costly in electricity and gold mining requires physical exertion through machines or manpower.
Miners themselves are the Bitcoin Network – with Miners replacing centralized organisations like Banks and maintaining the Blockchain. When transactions are carried out, they are added to the chain. When a number of them are added together they are added as a block. Miners are rewarded with 12.5 Bitcoins when they successfully add a block to the chain. It requires a large amount of energy and power to mine those 12.5 Bitcoin by yourself so most miners operate together in pools and split the rewards proportionally to the miners “hash rate” (the amount of work done by the equipment you bring to the table)
Back to the question at hand – what is the halving? As many already know – the total number of Bitcoins that will ever exist is 21,000,000. When the mining of all of these coins are done (estimated to be at around the year 2140) – no more will be added.
Even though this is a fixed number, the Block Reward is not fixed. It started out as 50 Bitcoin per block. A single user back in the early years of 2009 – 2010 was able to mine thousands of Bitcoins in a very short space of time. (Worth noting that the value per coin was basically nothing.)
The Bitcoin halving is a set event – that will occur at set intervals. Every time the network reaches 210,000 blocks generated it will half the block reward, which at current estimates means that this will occur every four years.
As mentioned, there have been two previous halving events, one in 2012 and the other in 2016.
2012’s event reduced the reward from 50 to 25 BTC per block, and 2016 down to 12.5.
Historically, there has been a strong positive uptick in price around these events, which proves lucrative for investors and early adopters. On the first halving, in 2012, the price was at $12. In the following year the price has increased by a factor of 10. Trading upwards of $120.
During the second halving in 2016 Bitcoin was trading at $650. It had increased almost 400% the following year – with that year ending with the unprecedented rally where the price reached around $20,000 per coin.
The date of the next halving is fast approaching and investors and experts are trying to work out what will happen next with one thing for certain, Bitcoin is finite and every coin lost or destroyed is adding to the value of each coin in active circulation or secured in offline storage.
The two parabolic events after each previous halving were due to the shock overnight decrease in supply – where the market fought to find equilibrium. The first took two months to appear, with the second happening almost straight away. (This could have been due to the increased exposure and adoption of Bitcoin since the early days of 2009 to 2013.)
Future halving’s post 2020
The next logical thing to ask is what happens when Bitcoin runs out? Who pays the miners for work done securing the network?
Miners also profit from transaction fees, which is distinct from Block Rewards – when a user sends Bitcoin to another user’s wallet a fee must be paid. With those paying more for the transaction to go through quicker and take priority over others. Nakamotos vision for Bitcoin set out the fact the coin would be deflationary by design. (Charges typically are cents in the dollar equivalent and transaction times vary from minutes up to a couple of hours.)
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