The Capital
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The Capital

Bitcoin halving: What does that mean?

By Alpha Roc on The Capital

Photo by Chris Liverani on Unsplash

On May 11th, 2020, Bitcoin underwent another significant milestone: Halving. This is the third halving since its creation in 2009. The first halving took place in November 2012, the second in July 2016, and the next one due in May 2024.

What is halving?

Bitcoin relies on “miners” who run software that race to solve complex mathematical puzzles for transactions. These miners receive Bitcoin in return for solving such puzzles, and thereby increase the number of Bitcoins in circulation. The 2020 halving event means that the reward for unlocking a block has been cut by half, from 12.5 to 6.25. Halving was written into the cryptocurrency’s code by its creator Satoshi Nakamoto in a bid to control Bitcoin’s rate of inflation. Bitcoin’s code also meant that rewards to miners will continue to halve every 210,000 blocks until it reaches zero in approximately two decades time, thus limiting the total number of Bitcoins in circulation to cap at 21 million. The idea here is to counter the notion of inflationary economics and specifically unconventional monetary policy such as quantitative easing or negative interest rates.

What is next?

Bitcoin miners will see a drop in their revenue due to the halving event, as they will receive half the rewards they used to receive previously. Consequently, miners will immediately see a drop in their revenue should the price of Bitcoin doesn’t react to the halving event. In the last 2 halving events, it took some time for the quantity and the price of Bitcoins to return to some sort of price equilibrium, as a result, a decrease in hash rate across the blockchain is to be expected, as miners get incentivized to find new blocks.

What happened in the last 2 halving dates?

On the first halving in November 2012, prices of Bitcoin stood at around $10-$12. However, prices of Bitcoin stood at approximately $650 during the second halving in July 2016, an astonishing increase of 6500%. On May 11, 2020, the price of Bitcoin was around $10,000, an increase of about 1500% from the previous halving. As such, we can expect a stellar increase in prices by the next halving event, which is due in May 2024.

Conclusion

The deflationary aspect of Bitcoin, while largely because of the halving set by Satoshi, and due to the crypto community cohering not only technically but also ideologically. The 21 million Bitcoin limit while is strictly enforced by the Bitcoin protocol, can be subverted through non-technical means such as creating a fractional reserve system that varies on the Bitcoin monetary base. However, because the community at largely lived by these deflationary principles, it is what really guarantees Bitcoin’s deflationary economics.

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