Explained with its impact on crypto market
After certain intervals, all cryptocurrencies go through an important hard-coded event known as “halving”. For Bitcoin it is 4 years. It happened in 2012 and 2016 and will happen this year in May.
In this blogpost, I’ll cover the details of “why this process is important?” , “how it takes place?” and the impacts of this process on Bitcoin traders this year.
Satoshi Nakamoto, founder of Bitcoin, modelled bitcoin as a physical commodity (think of gold), which is finite in numbers. Even if the demand increases there can only be a finite amount of gold as opposed to currencies which are infinite and are distributed and managed by central banks. In the case of Bitcoin that upper limit is 21 million.
Every time a Bitcoin transaction takes place, it needs to be added in the bitcoin blockchain by solving a complex mathematical problem which verifies the transaction and marks it complete. Multiple transactions form a block which gets added in the blockchain, making it a problem requiring huge resources to solve. That is how new bitcoins come into circulation.
The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended . ( — Satoshi Nakamoto)
People who do this calculation are called “Miners” and the process is called “Bitcoin mining”. The same is true for almost all other cryptocurrencies. Miner is rewarded on every successful addition of a block in the blockchain. To implement the gold like economics, Satoshi came up with a “Bitcoin Halving”.
Bitcoin halving occurs every 210,000 blocks successfully added (approximately 4 years) which reduces the miner reward by 50%. When Bitcoin started the reward was 50 then it came down to 25 in 2012 and 12.5 in 2016. This makes the generation and circulation of new bitcoins even harder same as gold where extracting gold is getting costlier over time. This mechanism ensures
- decrease in the the rate of increase in amount of Bitcoins in circulation.
- a long long time to reach the 21m cap as after a certain number of halving, Bitcoin will be too costly to mine.
- stability in the market and keeps the price increasing steadily over time.
- makes the bitcoin a scarce commodity to acquire in the future which in turn affects the market price.
As of today, the reward is 12.5 Bitcoin per block added and cost of mining 1 Bitcoin is around $6500. Next halving is expected at 12 May 2020 09:58:27. Since after every halving cost of mining a Bitcoin increases significantly, price increases as well. This can be seen in the bullish rallies of 2013 and 2017, where the price hiked by 8000% and 2500% respectively.
People have been speculating a great year ahead for Bitcoin. To know more please go through “Bitcoin Trading 2020: Bitcoin halving, price surge and trading opportunities”
I am working on series of blog for cryptocurrency geeks covering trading methods, mechanisms, indicator theory among others on thebitcoingeek.com. Be sure to check it out in a couple of weeks:). Appreciate any constructive criticism.
Happy Trading! :)