The Bitcoin Halving — What is it?
There’s been a lot of buzz around the upcoming Bitcoin halving on the 11th of May. But what’s it all about?
Today we’re breaking it down — what the halving is, what block rewards are and why this might affect the price of Bitcoin.
What is the halving of Bitcoin?
Every four years, the supply of Bitcoin is designed to slow down the addition of new bitcoins into the market.
Bitcoin has a limited supply of 21 million coins, and so far around 18 million have been mined. The design of Bitcoin is specifically set in such a way to make the currency scarce over time — essentially the exact opposite of what today’s central banks do, which is to print money in an effort to stimulate economies, like we’ve seen happen in response to the COVID-19 global crisis.
The finite nature of Bitcoin and its limited supply is why the term “digital gold” is thrown around when we talk about it. Since gold cannot be simply created and needs to be mined creating scarcity of the shiny metal.
The 18 million bitcoins in circulation is around 85% of the total supply, and this is where the halving comes in. To make the gold comparison again, Bitcoin was programmed to halve the number of bitcoins rewarded to miners every 210,000 blocks (or roughly 4 years) which is quite similar to how over time, gold becomes scarcer and more difficult to mine.
A block reward is the number of bitcoins that a miner receives for successfully mining a block of transactions.
First let’s cover blocks: a block is a bundle (<- see what we did there 😉) of transactions that are being sent over the Bitcoin network.
As an example, if Amy wants to send Billy 0.5 bitcoin, she digitally signs a transaction saying that she wants to send Billy’s address 0.5 bitcoin, and the transaction then goes into a queue.
Miners then (usually) select the transactions that are offering to pay the most fees and begin trying to solve a relatively random complex mathematical problem. The first miner to solve the problem is paid with the fees that each transaction carried and is also rewarded some fresh bitcoins.
How many bitcoins do you get for mining a block?
New blocks will produce 6.25 bitcoins, half of the current 12.5 bitcoins.
When Bitcoin was first created, the block reward was 50 bitcoins per successfully mined block. This means that in the first four years around 10.5 million bitcoins were mined. Over the next four years an additional 5.25 million bitcoins were mined, and between 2016 and May 2020 the network will generate 2.625 million bitcoins, totalling around 18,375 million bitcoins.
Once the next halving event happens in 2020, over the subsequent 4 years miners will be able to mine a mere 1,312,500 bitcoins, a mere 12.5% of the total amount mined in the first 4 years.
While it might seem unfair that the original miners were so handsomely rewarded for their efforts, and soon miners will earn 1/8 of the original reward, we must also consider the risk of mining on a network and concept that had never before been imagined. This was a considerable risk for people to invest in, and the reward potential needed to be there to entice people onto the network.
When is the next halving?
The next halving is on the 12th of May at around 05:41 GMT+2 or 03:31 GMT+1.
The last bitcoin will be mined sometime in 2140, at which point we expect the price of Bitcoin to be high enough that the transaction fees will be enough for a miner to be profitable without a block reward.
Won’t miners leave the network if the reward lowers?
Hobbyist miners and small businesses might be forced to upgrade their hardware or to leave mining altogether.
Most mining today is undertaken by large companies that are worth millions and in some cases billions of dollars. At the very start of Bitcoin, it was possible to mine on a laptop, however now these companies use highly specialised and expensive computers and hardware to mine as efficiently as possible.
As the block reward becomes less significant, mining rigs that are barely covering production costs will be forced to leave the market or opt to join or create mining pools to retain some profitability. The risk here is that the network might become less decentralised. Jimmy Song put together a pretty comprehensive article on mining centralisation scenarios that’s worth a read.
How might it affect the price of Bitcoin?
The bitcoin price has historically increased, but that’s not to say it definitely will.
A Bitcoin halving cuts down the supply of Bitcoin, it’s like reducing the rate of inflation for Bitcoin, making it more scarce. But scarcity means nothing if there isn’t a demand. We could draw you a picture of a red elephant with a fedora and since there’s only one image like this that we’ve ever produced, it would be super rare and therefore incredibly valuable, right?
Wrong. Nobody wants a badly drawn elephant wearing a ridiculous hat, so it would be worth nothing. While Bitcoin is unlikely to go to zero, the reward halving has less to do with how much of a reward a miner gets and more to do with whether the lesser reward creates a larger appetite for buyers due to a perceived scarcity.
Historically, we can offer some anecdotal evidence on previous halvings.
On the day of Bitcoin’s first halving, the price rose from $11 to $12, and continued to climb up throughout the next year, reaching $1,038 within 12 months.
Then, a month before the second halving, Bitcoin’s price followed a similar pattern. It went from $576 to $650 in a month. Bitcoin continued to accelerate and 12 months later it was trading at $2,526.
Will it be the same this time? Some argue that price surges in 2019 and more recently in 2020 have already factored in the halving.
In the last month we’ve seen the price of BTC rise by over 130% since it bottomed out at $3,867 on March 13. Then its price jumped from $6,700 to $9,400 in the last 10 days of April, before gaining over 15% last week. That’s a seven-week winning streak, and it’s first in 12 months.
So is this a good time to buy Bitcoin?
Well, since we advocate for long-term investing we don’t pay much attention to the short-term ups and downs on a weekly, monthly or even yearly basis.
Over the long-term we believe Bitcoin is going to go up in value but remember to do your own research, form your own opinions and understand your own investing strategy before investing.
One thing we can say for sure is that it’s an exciting time to be Bitcoin HODL’er! Sit back and enjoy the ride.
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This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose and before investing, please take into consideration your level of experience, investment objectives, and seek independent financial advice if necessary.