From Bitcoin to Mining to Halving, all explained like we’re five

By Yash Yadav on The Capital

Yash Yadav
Jun 20, 2020 · 6 min read
Coinus Halvenus

If you have been an avid internet user, you probably have recently read about bitcoin halving.

If not, you’re wrong because I just said it! and now I’ll explain.

But let’s slow down and talk about bitcoin first. Not everyone has had the time to pay much attention to it, considering it just another buzzword or a piece of IT jargon. Especially if you’ve been busy writing fictional stories lately;

If your reply to that tweet is: “+1”, then fret not as today is KnowledgeDay!

Bitcoin is a cryptocurrency that works on the blockchain principle. Robin seems to be updated with the tech of the future and batman could use some know-how. Batman asked him for a quick explanation in layman terms…

Ouch!

Alright, now here’s my take on blockchain and cryptocurrency in general. The dots should connect to bitcoin just fine:

Blockchain

Break the word and you see “Block” and “Chain.” Block here can be referred to as a bank’s register that logs all transactions. What happens when a register fills up? They put it in a locker and continue logging transactions in a new one. This can go indefinitely as we’re assuming an infinite supply of registers.

All good? Now remove the bank. It was never there. Who would keep the registers? That’s right! You!

But my other subscribers tell me they don’t trust you with the register. If you alter the transactions, they wouldn’t know about it. And I think that’s fair, so wouldn’t it be good if everyone has their own registers where they all log the transactions? How? Just imagine all the transactions are announced citywide so everyone can jot it down to their personal registers.

In case one of the bookkeepers alters a transaction in their register and claims that it’s correct then we all can from an assembly to tally the data with everyone. That way we’d know if it’s fake or legit. If the majority of people have the transaction in their registers, it’s probably legit. Otherwise, it never happened, and the culprit will have to slash out the fake transaction from their register.

Yep, the system literally assumes there’s no bank and no privileged authority and no one trusts no one. Now, if you have been along with me so far, I think it’s time to forget registers and take it all online. Back to the original term, “Block”. The transactions are ‘announced’ by the sender/receiver themselves and are logged into everyone’s personal copy of blocks. Everyone is connected, and that is why it’s a “chain” of “Blocks.

Example: When you ‘announce’ about the money you will be sending me after reading this article, everyone’s blocks will have the transaction logged automatically. If the ‘announcement’ part scares you, then let me clarify this is where the ’crypto’ part comes in. The transaction will be public but only with your private name, no one knows about. It’s supposed to be tadbit uncommon than XÆA-12.

I hope it helped you get a decent enough picture of the Bitcoin. Let’s quickly talk about another popular term that follows Bitcoin.

Bitcoin Mining

Image: Hardworking field engineer mining bitcoins

Nope, Nope, that’s not how it’s done. It’s the currency of the internet, and bitcoin mining involves solving complex mathematical problems. We, humans, are slow with calculations. We are smarter than our pets but that’s exactly how computers perceive us. ;-)

The thing is, if all of our computers started double-checking transactions worldwide for authenticity. They’d all end up constantly eating up network data and computational power 24x7. You don’t want your computer overworking just for you to be able to use some quirky internet money to order pizza. That is where miners come up. These guys do the heavy lifting of solving mathematical problems and confirming the legitimacy of a transaction. They then add the transactions to the end of a block and create chains of these blocks of transactions, forming the blockchain for you.

No one works for free, not even computers, and hence Bitcoin follows what’s called the Proof of Work. This system allows the miners who have put forth effort in processing transactions to be rewarded. When a block is filled up with transactions, the miners that processed and confirmed the transactions within the block are rewarded with Bitcoin. This is the only way new bitcoins enter the chain. Miners can be seen as the feds and the reserve bank of the blockchain and this process is called mining because the work done to get new Bitcoin out of the code is the digital equivalent to the physical work done to pull gold out of the earth.

Bitcoin Halving

“Hah! Obviously, this means cutting the bitcoin in half, I saw the cover image.”

Not entirely wrong, but definitely not done the way as in the cover image. This is sort of unfortunate for the miners.

Let me explain.

There is a limited number of bitcoins ever going to be present in the system. 21 million to be precise. The limitation is because of the design and protocol. Accept it.

The proof of work system isn’t as simple as I’ve explained above (and for that matter, nothing here can be detailed in a 6 minutes read), meaning wise it’s no [ if 2+2=4 then reward bitcoins ] protocol. It’s somewhat more complex. But for the sake of simplicity of this post and your time, let’s just accept that the mining process involves a lot of heavy computation power and a lot of brute force (try and error). The mining process takes time and gets more and more difficult as new bitcoins are extracted over time.

To add to the calculation difficulty, the reward given to Bitcoin miners for processing transactions is cut in half after ever 210,000 blocks mined (around every 4 years). This is what they call the bitcoin halving event. The most recent halving event occurred no more than 2 weeks ago, on May 11, 2020, around 4 PM EST.

This halving event cuts in half the bitcoin’s inflation rate (the rate at which new Bitcoins enter circulation). At the time of writing, there are 18,394,475 already in the circulation, leaving just 2,605,525 left to be mined. With increasing computation difficulties and all halving events, this approximately expects all of the 21 million bitcoins to be mined by 2140.

Well not really, more like half it to blow it.

Each halving event takes a few miners away but magically brings more eyes to Bitcoin and consecutively brings in more miners. What magic? You ask. Well, charts give us a better picture (pun intended).

Image from Investopedia

Need help to make sense out of it? I needed it too.

Now imagine we know the total amount of Gold on our planet. If the amount of gold mined out of the earth is cut in half every 4 years, what would happen? Because of the scarcity, lowering the gold output every four years would theoretically drive its price higher. Yes, you’re looking at digital gold!

Here’s a flow chart of the process:

In theory. You can never guarantee the gold’s rule applicability on Bitcoin. The price increase is entirely dependent on how much people are willing to pay for something that is limited. But, as you can look in the chart above, the process seems to have proven successful twice. Also, it can be seen that the price jump is not immediate. For example, after the July 2016 halving, the ICO boom happened at the end of 2017.

So, what happens after this month’s halving, can’t really be predicted. Your money is in your hands. If you plan to invest, just do some self-research.

Then you’d also like to hear more from me. I run a newsletter wherein a new interesting topic like this is discussed about. Twice, every week.

You can check my other topics here.

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