Bitcoin Halving 101
Did you know the first-ever Bitcoins were used to purchase pizzas? In 2010, a man used 10,000 Bitcoins to purchase 2 Papa John’s pizzas that valued around $25. Today, the same quantity would value $87 Million. Imagine if he had held on to those Bitcoins back then.
Bitcoin’s supply is finite. Once 21 million Bitcoins have been mined, that will be a halt for this cryptocurrency. That’s why Bitcoins are also known as digital gold, its a scarce resource, and someday all of it will be extracted. However, there are still 18 million Bitcoins out there waiting to be found, thus it’s a long way from running out. It is predicted that in 2041 the 21 millionth Bitcoin will be mined.
How does the Halving Work?
When miners successfully earn/mine a Bitcoin by solving highly complex mathematical problems, they get rewarded for their hard work. This reward is a block, which contains a certain amount of Bitcoins that miners receive. In simple terms, the Bitcoin halving is directly referring to miners receiving half the amount of Bitcoins as a reward than they previously used to in each block.
Every 10 minutes a miner is rewarded with a block and given the prize of new Bitcoins. The halving occurs after every 210,000 blocks are mined or every 4 years. The first block ever mined in 2009 had a reward of 50 Bitcoins. Block no. 210,001 mined in 2012 was then rewarded with only 25 Bitcoins, followed by block no. 420,001 mined in 2016 containing only 6.25 Bitcoins, with earlier this month block no. 630,001 rewarding just a mere 6.25 Bitcoins.
Why halve the Bitcoin?
For Bitcoin to be valuable, it needs to be scarce, like gold. If the coins are created too quickly and there is no end to the number of Bitcoins that can be created, eventually there will be so many Bitcoins in circulation that they would have very little value, said Nate Martin. Picture it like gold, there is only a limited amount of gold in the world, and with every gram of it that is mined, the remaining gold simply becomes harder to extract. This limited supply of gold has ensured its high value and is today used as an international medium of exchange. Bitcoin hopes for the same.
Unlimited Bitcoins=debasement in value. But, with only 21 million of these available, and thanks to the halvings, Bitcoins will have a long, predictable, and unchangeable release rate. This will also help keep inflation under control, as scarcity prevents inflation!
However, why this specific formula to halve bitcoins at a constant rate was chosen still remains a mystery. Bitcoin is said to be created by Satoshi Nakamoto, whose true identity is not yet verified. He and his so-called team disappeared a year after releasing this cryptocurrency, leaving everyone thinking what the logic was behind this.
How does halving affect its price?
In the past, each halving has seen massive surges in the price of a Bitcoin. This is simply a play around the demand-supply principle. As each halving reduces the rate at which new Bitcoins are created, it also lowers the available supply for them. This pushes up the demand for them, which also leads to an increase in price. Thus, miner incentive remains as even though they are receiving fewer Bitcoins for each block found, its value is increasing.
However, no one really knows what to expect from the value of a Bitcoin after a halving event. In the past, the price against USD was seen to be increasing after 3 months-1 year from when the halving occurred. Looking at the halving that happened earlier this month, Bitcoin touched a price of $10,000 a few days before the halving, and as soon as the halving happened the price dropped to around $8600, followed by various increases and decreases since then. Today, the price stands at nearly $8800 reported coindesk, thus proving the fact that no one really knows what to expect from a halving. Some analysts have even predicted 6 figure Bitcoin values.
However, in the circumstance that the value of a Bitcoin is not increasing after a halving, to ensure miner incentive, the Bitcoin has a process such that the difficulty of solving complex mathematical problems to find a block would then reduce. Thus, even though miners will receive fewer Bitcoins for the same price, their incentive to keep mining will remain.
Originally published at https://www.linkedin.com.
