As the Bitcoin halving approaches, crypto investors everywhere are scrambling to get their holdings in position. But wait, what is the halving, and should it matter to you?
In reply to the latter, the answer is a resounding yes. Now, explaining the halving is a slightly more complicated matter, but we strongly suggest informing yourself with the help of this clear guide on the most important Bitcoin event of the decade.
The Halving Is All About Supply and Demand
All forms of money have a supply that is, in theory, supposed to meet demand. If monetary supply outstrips demand, the result is inflation. In economic theory, this effect is known as “too many dollars chasing too few goods.”
When Satoshi Nakamoto coded Bitcoin’s economic mechanics at the protocol level, making the Bitcoin network anti-inflationary was a key goal. To that end, Nakamoto created a quadrennial event called the halving.
In a nutshell, the halving reduces the amount of newly minted BTC by half from the point of the halving onwards. Reducing the amount of newly minted BTC every four years drastically limits the overall circulating supply, creating a smaller quantity over time as demand (in theory) rises or maintains.
However, understanding the halving in greater detail requires a refresher on the way Bitcoin mining works and the role it plays in minting Bitcoin.
Bitcoin Miners Cart Fresh BTC Into the Supply
We know Bitcoin has a maximum supply of 21,000,000 BTC, but it is critical to note that maximum supply is different from circulating supply. At current, there is a circulating supply of 18,062,037 BTC, leaving us with a difference of 2,937,963 BTC yet to be mined.
The way to unlock new BTC, thus minting it into the circulating supply, is by mining it. To describe the mining process, let’s back up a bit.
Let’s suppose that you, along with several other people around the world, create Bitcoin transactions around the same time. Your transactions are rolled into a block, which then needs to be confirmed by miners to guarantee its validity.
The process of validating transactions is mining. At its core, it is basically a process for saying, “why yes, these transactions are real, and the values they represent are correct!”
Here’s where things get interesting. The blocks containing transactions have secret codes, known as target hashes, that need to be guessed correctly to be validated. Miners compete with each other to guess these target hashes.
Why? Because whoever validates a block gets the block reward contained inside. What is the block reward? Yes, that’s right, you guessed it – it’s newly minted Bitcoin. Currently, the block reward is set at 12.5 BTC per block. When Bitcoin is worth $10,000, each block nets miners a princely sum of $12,500.
That’s is why crypto mining is such a competitive industry, and how mining unlocks Bitcoin into the supply.
The Halving Reduces Block Reward by Half
We’ve just gone over the process of Bitcoin mining, and now we’re all on the same page about the 12.5 BTC block reward. Let’s circle back around now to the halving.
The halving (which happens every four years, remember?) reduces the block reward from 12.5 BTC to 6.25 BTC. That’s notable for several significant reasons, some of which we’ll outline here.
- Reduced block reward makes mining more competitive, as the incentive to mine more blocks rises (so that miners can break even on costs).
- Slashing the block reward by half means the Bitcoin emission rate slows down – way down. If the Bitcoin demand remains where it is now – or increases – then there is less BTC than demand. If you’re curious about what that means for prices, then please refer to the Q4 2017 Bitcoin chart.
- The incentive to HODL Bitcoin rises as cryptocurrency investors seek to position themselves in anticipation of the halving.
In short, reducing block rewards has enormous repercussions for Bitcoin economics. As is also well known, the entire cryptocurrency market depends on Bitcoin as the reserve currency. Therefore, even non-Bitcoin holders are watching the event.
Will the Bitcoin Halving Make BTC More Valuable?
Everyone is wondering whether the halving will produce a great effect on Bitcoin prices or not. If one references the charts to look back at the previous two halvings (in 2012 and 2016), it’s clear as day that the halving did positively impact the market.
However, past performance is not indicative of future results. Put simply – nobody knows precisely how Bitcoin trading will be affected, though public perception certainly errs to the bullish side.
In 2020, Bitcoin will become more scarce than ever before, while at the same time possessing unprecedented global name recognition. That’s a compelling – and optimistic – combination, so the best bet is one that mixes patience with guarded optimism.
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