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Guide: Bitcoin Halving Explained

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In the landscape of Bitcoin and altcoins, Bitcoin halving is a major phenomenon. Approximately every four years, Bitcoin undergoes this significant event. Interestingly enough, Bitcoin halving has only occurred twice ever since Bitcoin’s introduction to the world. This fact sort of marks its significance and relevance to Bitcoin’s market value.

Despite accepting Bitcoin into our financial lives, the majority of us are far from familiar with the technical aspects of Bitcoin like halving and mining. This comprehensive guide details everything about Bitcoin halving that an average beginner needs to know. So, let’s get into it!

What is Bitcoin Halving?

Bitcoin halving is a tool/method that ensures that Bitcoin does not lose its value due to excessive mining over time. As for mining, it is the process that ensures the safety of the network and the transactions. Mining includes solving complex mathematical problems and generating new Bitcoins for circulation. Miners (developers who perform mining) get rewards in return. These rewards have actual value and can be traded in the market.

Additionally, these rewards need to be moderately high since they need to incentivize miners. However, the rewards shouldn’t be too high as to cause an overflow of Bitcoins and degrade the currency. Therefore, after a certain number of blocks, the mining reward drops by half. In the Bitcoin space, this event is termed as “Bitcoin halving.”

Background

Satoshi Nakamoto created Bitcoin with the intention to introduce a system that was self-sustaining. As a result, the Bitcoin ecosystem closely resembles gold-mining. In gold-mining, miners spend resources to ensure that more gold is in circulation. Similarly, Bitcoin miners spend resources, CPU time and electricity, to put more Bitcoins in circulation. But over the course of time, this mining will become more challenging, and to control the supply, the rewards for miners will slowly reduce.

To deal with this problem, Nakamoto introduced the concept of Bitcoin halving. In the early days of Bitcoin, the reward for mining Bitcoin was 50 BTC for every 10 minutes. And according to the Bitcoin code by Nakamoto, after every 210,000 Bitcoin blocks, this mining reward should reduce by half. At 10 minutes per block, it is approximately four years.

The first Bitcoin halving took place in 2012 when the mining reward was 50 BTC. After the event, it reduced to 25 BTC. In 2016, the reward dropped to 12.5 BTC. After the halving of 2020, it will fall to 6.25 BTC, and so on.

Effect of Bitcoin Halving on the System Economy

As we mentioned earlier, Bitcoin halving is a significant phenomenon and significantly influences the Bitcoin network. Let’s take a look at what the effects are.

1)  The halving helps to sustain the mining reward system over a longer period of time. Initially, the mining reward was 50 BTC. Without the system of halving, we would still be releasing Bitcoins at 50 BTC every 10 minutes. At this rate, we would have reached the maximum supply cap of Bitcoin, i.e. 21 million coins in just eight years. This means the process of mining on the network would stop after eight years. By halving the rewards every 210,000 blocks, we are ensuring the continuation of the mining process for a substantial period of time.

2)   Due to the system of Bitcoin halving, there are steady hikes in the Bitcoin prices over the course of time. With the reduction in mining rewards, the number of newly mined coins decreases significantly every year. This, in turn, limits the total supply of Bitcoins in circulation causing Bitcoin prices to climb.

3) With the Bitcoin halving process in effect, the cost of mining every single Bitcoin increases over time. This is because of the increase in the network difficulty and the decrease in reward rate. Therefore, the actual cost of mining Bitcoin rises over the years, causing the spikes in the Bitcoin trading prices.

The Future of Bitcoin Halving

So far Bitcoin halving has worked wonders for the Bitcoin ecosystem’s economy. Now, looking to the future, let’s face the much-dreaded question: what happens when the mining rewards plummet to zero? With no rewards to reap, will miners stop mining Bitcoins altogether causing the system to come to an abrupt halt? There are several possibilities that offer probable answers to the question.

1) Considering halving and the current rate of mining, the final Bitcoin block will be mined somewhere around 2140. And as the network operation commenced in 2009, the mining on the network will have continued for 130 years. Now, 130 years is quite a long time. Having been functional for 130 years, the network may enter an entirely different economic state and may not need any block rewards.

2) Another thing worth considering is that Bitcoin miners don’t solely depend on block mining rewards. They have a secondary source of income. To be specific, miners also earn money from transactions on the network for which they charge a fee. So, it is a possibility that in 130 years, mining could be quite profitable with rewards from a vast number of network transactions.

3) Finally, the third possibility involves the emergence of new projects that plan to co-exist with the Bitcoin network. With such layer networks in operation, miners will be able to earn transaction fees from these, as well as the Bitcoin network. Therefore, block rewards may not even be necessary.

Final Note

Having finally drifted down the page, we understand that Bitcoin halving plays a vital role in the steady hike of Bitcoin prices. If the concept of halving had not existed, Bitcoin would still be trading at fifty or a hundred dollars.

It would never have seen the pump that made it what it is today. As for the future, nothing is certain, and there are some hopeful possibilities in sight. If the Bitcoin system can maintain its status for 130 years, it will in all probability grow beyond that.

 

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