With Bitcoin set to undergo Halving sometime this month the entire crypto community is on a Wait and Watch mode to find out exactly what will happen to the value of the King of Crypto. Read on to understand what is Bitcoin Halving and what to expect when it happens.
What is Bitcoin Halving?
A Halving, or Halvening, is a planned reduction in the rewards that cryptocurrency miners receive when a block is mined. This is a rule integrated into Bitcoin’s code and Halving is set to occur exactly when 210,000 blocks are mined. Each block takes 10 minutes to mine. In 2009 miners would earn 50 BTC as reward when one block was mined. 4 years later, in 2012, Bitcoin halved for the first time and miners started receiving 25BTC. In 2016 BTC halved a third time to its current reward level at 12.5BTC per block mined. This month, May 2020, it will go through Halving again and the new mining reward will be 6.25BTC per block mined.
Bitcoin’s creator, The Pseudonymous Satoshi Nakamoto, worked out this formula for issuance of new coins to keep reducing the inflation rate. This in turn gives the coin more value.
Less coins rewarded per block = Reduction in supply = Increase in demand = Increases value
Also, in the algorithm of Bitcoin is moving average to determine the proof-of-work difficulty. This means that if blocks are being added too fast the algorithm will increase the computational difficulty of the problems and make processors take longer to verify transactions and add them to a block. By this method one block will always take roughly 10 minutes to be completed and added to the blockchain.
What is mining and how will Halving affect Miners?
Mining is the process by which new coins are created and given as a reward to people performing the task. The only way bitcoin can be created is by the process of mining. Every time a new block is completed and added to the blockchain miners receive 12.5 Bitcoins as a reward (as mentioned above). Miners then either accumulate Bitcoin or sell it to recover their expenditure. Bitcoin is extremely volatile when compared to stable currencies like USD or EUR. Miners sell their awarded bitcoins for Fiat currencies in order to pay bills and maintain their equipment. To put it simply miners can not sell their bitcoins when bitcoin’s value compared to USD/EUR has suffered because they wouldn’t be making as much profit on their efforts. Opposite to that if bitcoin gains a lot of value compared to fiat, Miners can sell even a small portion of their BTC and make huge profits!
All professional miners use heavy duty mining hardware to mine bitcoin and other cryptocurrencies. These rigs which consist of one or many units of hardware, including computers, consume a lot of electricity. These units of hardware are programmed to solve complex mathematical problems to come up with a solution and add it to the ongoing block (verifying a transaction). Their efficiency is decided by their hash rates and each variant of hardware has a different hashing power resulting in the speed at which the calculations are done. These rigs, or sets of equipment, apart from consuming a lot of electricity, also tend to overheat in the process. Miner also have to make sure they have a good and reliable internet connection. Miners has to determine whether their set up is profitable enough to mine their desired cryptocurrency keeping in mind the cost of the equipment, electricity consumption and cooling mechanism. In relation to Bitcoin Halving this simply means that where miners were getting 12.5 Bitcoins for performing the work, after halving, will be receiving only 6.25 Bitcoins for the same amount of work. At times like these a miner has to consider sustainability in terms of payment of bills and maintaining their equipment.
What will be the effect of this Halving on the price of Bitcoin?
The first Halving of Bitcoin took place on 28th November 2012 when bitcoin was at roughly $10. The coming year, 2013, saw bitcoin shoot up to approximately $1007 (8069% growth). The next halving happened on 9th July 2016 when bitcoin was roughly $700. The following years, 2017 and 2018 saw bitcoin reach its all time high of $19,783! While it is extremely difficult to predict what effect the halving might have on price of Bitcoin, historical data suggest that there is a high probability that we might see bitcoin break its All Time High and go even higher. The entire Crypto Community waits eagerly to see what will actually happen and sentiments remain optimistic.
This week saw Bitcoin support a rally of nearly 20% reaching roughly $9500. Data from Skew.com suggests that this rally was caused by spot exchange services like Coinbase which offer their users facility of buying crypto with fiat currencies. The optimistic sentiment and speculation surrounding Bitcoin’s upcoming Halving has driven individuals to buy BTC
Limited Supply and Adoption
There will only ever be 21 million Bitcoin. After the Last bitcoin has been mined, which is expected around the year 2140, no new bitcoins will be created and Miners will receive just the transaction fee and no Bitcoin rewards for mining. To add to this, millions of Bitcoins have been already taken out of circulation by individuals who have lost access to their wallets. According to digital forensics firm, Chainalysis, about 3.79 million Bitcoins are out of circulation forever! At the time of writing this article Bitcoin is at $9000 and 3.79 million Bitcoins translate to 34.11 BILLION DOLLARS!
As Bitcoin gains popularity more and more businesses and service providers have started accepting Bitcoin and other cryptocurrencies as payment. Bitcoin’s limited supply means that as adoption will increase so will its scarcity and demand which will be the driving factors of Bitcoin’s value. Even though there are thousands of cryptocurrencies in existence the most popular and most sought after will be Bitcoin.
So, what does all this mean in terms of the upcoming halving?
According to historical data analysis we can say that Bitcoin has broken its All Time Highs a few months after every previous halving. But times have changed. Laws have changed. Interest in Bitcoin has grown tremendously. People are more aware and educated. Media is drawn towards Cryotocurrencies and Blockchain and the amount of attention the industry is drawing is steadily increasing. It is impossible to say what the effect Halving will have on Bitcoin and one can only be optimistic about the outcome.
Here are some opinions on the event from the Crypto Community
Joel Bauer, Cryptocurrency Enthusiast
Well the global stock market is in for a shit show. Bitcoin still to this day has been a pure profitable long-term investment. The halving is just a reset of 4 years of new growth.
Gary Lang, Cryptocurrency Enthusiast
The 2016 halving just became fully priced in. Not over-priced in like the FOMO of 2017. We now have much more institutional participation coupled with temporary deflation of fiat, and high not hyperinflation looming in several months. This combined with bitcoin inflation dropping below USD inflation along with new consumer apps makes 2020 a likely watershed moment year.
Mike Knight, Cryptocurrency Enthusiast
At some point especially in the next 3 years people are going to wake up and realize there is not enough of BTC to go around. The key indicator is very simple. If you try and move your BTC off of Coinbase or cash app you only move so much in a week.
Stephen Drake, Cryptocurrency Enthusiast
Satoshi Nakamoto made the supply curve so that in his life he’d likely see Bitcoin world adoption.
Muhammad Sarmad Ayaz, Cryptocurrency Enthusiast
It’ll be very interesting to see how the price reacts to the halving while we have a pandemic and economic uncertainty. It’s anyone’s guess when we get a bitcoin valuing $20,000 and up.
I hope this article has simplified and helped you understand the concept of Bitcoin Halving and Mining. Please share it with your friends and help them understand too!