All You Need to Know on Bitcoin Halving and Why It Is Essential
Expected for many months by the whole community, and even beyond now, Bitcoin’s third Halving will take place in less than 20 days. At the current pace of adding of the new blocks on the Bitcoin Blockchain, this third Halving should take place on May 12, 2020.
The excitement around this key event for Bitcoin is growing. This is evidenced by the volume of searches on Google for the term “Bitcoin Halving” which have never been higher since the creation of Bitcoin in 2009:
Disappointed with the current monetary and financial system, many people are beginning to consider the plan Bitcoin.
The most concrete evidence of this newfound appeal for Bitcoin is the decision by many Americans to use their stimulus check of $1,200 to purchase Bitcoin.
There are signs that do not deceive. In a world where everything is going negative, from central bank interest rates, to the price of U.S. crude oil, and to equity market returns, safe havens will play their full role in the coming months.
Gold and Bitcoin, which have posted positive performances of +15% and +5% respectively since the beginning of the year, will therefore have the wind in their sails in the coming months.
Objectively, Bitcoin is superior to gold in many ways: greater divisibility, durability, portability, recognizability, and much scarcer.
For a large majority of citizens, Bitcoin will therefore be a better solution than gold.
If you are among those who are still hesitant to take the plunge and buy your first Bitcoins, you should ask yourself a lot about what Halving is, and why it gives Bitcoin a vital advantage.
In what follows, I propose to find out everything you need to know about the Halving of Bitcoin that will take place in May 2020. More importantly, I will tell you why this event is essential for Bitcoin.
How are new Bitcoins created?
As always, I think it is essential to get back to basics. To fully understand what Bitcoin Halving is, you need to understand when new Bitcoins are created.
New Bitcoins are created every time a new block of transactions is added to the Bitcoin Blockchain successfully.
When a new block is correctly added to the Bitcoin Blockchain, the first transaction in that block is the reward that will be paid to miners who correctly solve the math puzzle associated with that block.
This math puzzle is at the heart of Bitcoin’s consensus algorithm, the so-called Proof-of-Work.
Specifically, in order to correctly add a new block of transactions to the Bitcoin Blockchain, a miner must find the cryptographic signature that begins with a specific number of consecutive zeros for the data in a block of transactions.
Simplifying things, the more zeros added at the beginning of the cryptographic signature to be found for the data in a block, the more difficult it becomes to mine a block of Bitcoin Blockchain.
In order to guarantee an average production of one block every 10 minutes, the difficulty is adjusted every 2016 mined blocks. This results in an adjustment of the difficulty of the Bitcoin Blockchain approximately every two weeks.
The higher the computing power available on the Bitcoin network, the more secure the network is, and the higher the difficulty increases. This computing power available on the network is called the Hash Rate.
Halving contributes to the predictability of Bitcoin
With an average of one block mined every 10 minutes, we can say that 144 blocks are added on average every day to the Bitcoin Blockchain.
I say average because if the Hash Rate increases significantly, we will be able to have a higher production of new blocks per day. On the other hand, if the Hash Rate falls sharply, we would have fewer blocks produced each day.
Difficulty’s adjustment of the Bitcoin Blockchain then takes care of fixing things.
The Bitcoin reward given to miners who validate a block correctly will decrease over time. This is inexorable because everything is written in the Bitcoin source code.
This decrease in Bitcoin reward for miners occurs every 210,000 mined blocks, and is called Bitcoin Halving. Taking into account the average production of one block every 10 minutes, we can estimate that a Bitcoin Halving takes place every 4 years on average.
In fact, the sharp increase in Bitcoin’s Hash Rate over time makes this Halving a little faster than every 4 years.
Originally, the reward for miners was 50 BTC.
Bitcoin’s first Halving decreased this reward to 25 BTC on November 28, 2012. Bitcoin’s second Halving took place on July 9, 2016 reducing the reward to 12.5 BTC.
At the time of this writing, the Bitcoin Blockchain has 627,548 blocks.
Since a Bitcoin Halving takes place every 210,000 mined blocks, you understand that at block 630,000, the third Bitcoin Halving will take place.
Therefore, there are only 2,452 blocks left to mine before this third Halving takes place. By the time you read this story, there will be even fewer left. All of this allows us to estimate that the third Bitcoin Halving will take place on May 12, 2020.
After this third Halving, the reward for the miners will only be 6.25 BTC.
Now that you know in detail what a Bitcoin Halving is, I will tell you why this event is essential.
Halving makes Bitcoin’s monetary policy even more unique
Bitcoin’s monetary policy is as simple as it is powerful:
- A maximum quantity of 21 million units that will never change.
- An inflation of the daily supply of new Bitcoins that decreases over time to reach zero when all Bitcoins have been mined in 2140.
Bitcoin Halving that takes place every 210,000 mined blocks is what allows the daily supply of new Bitcoin to decrease over time.
This policy is reinforced by the fact that it is programmatic. It does not depend on any human decision which by definition would be arbitrary. Everything is automatic and predictable.
No matter what happens, the third Bitcoin Halving will take place. So what Bitcoin is proposing to you is the opposite of what is happening with the current monetary and financial system.
The economic crisis that is now beginning to unfold brings back to the forefront the solution that central bankers around the world have been systematically using to deal with economic problems: quantitative easing.
Quantitative easing is an unconventional monetary policy that involves buying a predetermined amount of government bonds or other financial assets in order to add money directly into the economy.
Before conducting this type of monetary policy, central banks prepare the ground by lowering interest rates to the lowest possible level. The Fed lowered them to zero in March 2020, while the European Central Bank has had negative rates for several years now.
The first disadvantage of quantitative easing is that the induced increase in the money supply will lead to currency devaluation.
Those who have most of their wealth in cash are the first to be penalized. Obviously, it is the poorest who are therefore impacted first. Indeed, they cannot afford to buy gold, real estate, or invest in the stock market.
Bitcoin’s monetary policy highlights the virtues of quantitative hardening.
Bitcoin Highlights the Virtues of Quantitative Hardening
Bitcoin Quantitative Hardening is to be contrasted with the Quantitative Easing led by the Fed.
Quantitative hardening consists in reducing the liquidity injected into a market over time by reducing the daily supply available. In this way, each unit of that market gains in value over time.
This policy is clearly the opposite of quantitative easing where the daily supply keeps increasing, which further weakens the value of the units available on the associated market.
Bitcoin’s quantitative hardening gives more value over time to what you own
From the third Bitcoin Halving in May 2020, the daily production of new Bitcoins will decrease from 1800 to 900 BTC on average.
For the first time in its history, annual inflation in the supply of new Bitcoins will fall below 2% in 2021 to 1.8%:
Even better, since a new Bitcoin Halving will take place at the beginning of 2024 after Block 840,000, the annual inflation of new Bitcoins supply will drop below 1% at that time.
This inflation of new Bitcoins supply, which tends towards zero over time, is something of paramount importance for the lucky Bitcoin owners.
A shock to new Bitcoins supply takes place no matter what happens about every 4 years. This supply shock reinforces the scarcity of Bitcoin.
With demand increasing due to the expected increase in Bitcoin price, but also due to an increase in the number of people who are disappointed with the fiat system and choose to test the best possible alternative, Bitcoin price must increase over time.
The value of Bitcoins you own will therefore increase over time thanks to this essential event that is Bitcoin Halving.
After reading this story, I think that you have now realized the importance of Bitcoin Halving, and more importantly why Bitcoiners are so excited about it.
See you on May 12, 2020 for the start of Bitcoin Season 4 that promises to be phenomenal.