Bitcoin Halving is occurring today – 12th May 2020.
Bitcoin Halving occurs every four years approximately or when 210,000 bitcoin blocks are completed. In each halving event, the block reward given to each miner is reduced by half, and hence the name ‘Halving.’
- In 2009, the reward for each miner was 50 bitcoins.
- In 2012, the reward was halved to 25 bitcoins.
- In 2016, the reward was halved to 12.5 bitcoins.
- In 2020, the reward will be halved to 6.25 bitcoins.
To understand Bitcoin Halving better, first, we need to learn about Bitcoin Blockchain, Bitcoin Mining, and Bitcoin Supply.
What is Bitcoin Blockchain?
The Bitcoin Blockchain is a record of all transactions related to bitcoins such as payments. The transactions are stored one after the other in a block. And when the block is complete, it is hashed and added to the chain. This process repeats whenever transactions take place.
We can imagine a bitcoin blockchain as a structure comprising a network of computers with Bitcoin software, spread across various locations. This network of computers validates the bitcoin transactions.
What is Bitcoin Mining?
The verification and validation of transactions on the Bitcoin blockchain are completed by miners. This process is called mining, and people who participate in the bitcoin blockchain network are called miners.
Miners use supercomputers or custom-built computers to maintain the bitcoin blockchain such as keeping the ledger of bitcoin transactions clean, consistent, and permanent. Bitcoin works on PoW systems. To be rewarded, miners will have to prove that they have put in efforts such as time and energy to solve complex problems and process transactions.
To create new blocks of transactions, miners compete with each other using their computing power to try to come first with the 64-digit hash that will be the unique ID of the transaction block.
Miners are rewarded with bitcoins each time they verify a new transaction block. Mining rewards are a combination of newly mined bitcoin units and transaction fees of already existing bitcoins.
These rewards incentivize miners when they participate in the mining process and ensure that the bitcoin network continues to be audited and essentially maintained.
What is Bitcoin Supply?
We all have heard Bitcoin being called ‘digital gold.’ But why? Because similar to gold, bitcoin is a scarce resource that’s immune to inflation. Bitcoin has a supply of only 21 million units and only 3 million units are yet to be mined. This value can increase only if the protocols regulating the bitcoins change.
With the current pace, the last bitcoin will be mined in 2140, that’s 120 years from now!
What is Bitcoin Halving?
Halving refers to the reduction of the bitcoin block rewards by half that is given to the miners. Currently (after 2016 halving), the block reward for miners is 12.5 units of a newly minted bitcoin.
So, when the halving occurs today, 12th of May 2020, the block reward will halve; therefore, the miners will get 6.25 units of a newly minted bitcoin. As we saw earlier, halving was programmed to occur every 210,000 blocks, and since it takes 10 minutes for a new transaction block to be added to the bitcoin blockchain, the average halving event occurs every four years.
To prevent inflation from decreasing the purchasing power of bitcoins, Satoshi Nakamoto programmed the halving to occur every 210,000 blocks. So, the faster the new blocks are validated, the more difficult it becomes for miners to create unique hashes for new blocks.
Implications of Halving
Gold is considered valuable because of its fixed supply. The algorithm that defines bitcoin’s fixed supply was programmed to make bitcoin more valuable than gold.
What we can understand from this is, if the demand remains steady or increases over time, the price of bitcoin will witness positive long-term effects. After today’s Halving, bitcoin supply will become more scarce than ever before.