What is the Bitcoin Having? The Bitcoin Halving Explained.
Cryptocurrency is, by definition, a decentralized currency, meaning no centralized entity controls its transactions or influences its value. The upside of decentralization is that it offers investors more financial opportunities, but the downside is that there is also greater risk.
Decentralization means a lack of a centralized controlling body. However, many people fail to realize that most Cryptocurrencies are self-controlling. For example, Bitcoin, the longest-established cryptocurrency, goes through a “halving process,” which directly controls the supply and, therefore, the currency’s value.
But what is the Bitcoin Halving? How does it work, what are the advantages, and what effect will it have on your Bitcoin investment? These, and many other questions, will be answered here:
A Short History:
Before getting into the nitty gritty of Cryptocurrency and Bitcoin Halving, it is important to have a quick look at the history of Bitcoin because this will help us understand both concepts better.
The concept of Cryptocurrency first appeared in 2007, and then in 2008, it was officially introduced as Bitcoin via a white paper. The paper was composed by Satoshi Nakamoto; a name believed to be a pseudonym. The persona of Nakamoto first appeared in 2007 and was intricately involved in developing Bitcoin and the Blockchain until 2010.
Nakamoto’s invention of the Blockchain is key to Bitcoin becoming adopted as a currency. The Blockchain database is a verification system that not only stores Cryptocurrency transactions but also prevents them from being duplicated.
When initially conceived, Cryptocurrency had one major stumbling block- people could duplicate it. By preventing duplication or “double spending,” the Blockchain added the needed level of security, and Cryptocurrency was soon being rapidly adopted worldwide.
First The Basics:
Before explaining the halving process, it is first necessary to explain the basics of what Bitcoin is and the process of Bitcoin mining.
Bitcoin can be defined as a decentralized digital currency that operates on a peer-to-peer network. Bitcoin transactions (sending and receiving) are digital entries to an online database, and these transactions are recorded on a public online ledger called the Blockchain.
Bitcoin is stored in digital wallets, and transactions to and from the wallet are verified by encrypted code. Bitcoin can be traded for goods or services or fiat currency if the suppliers, vendors, or traders accept Bitcoin as payment.
With Bitcoin mining, it is important to note that this term does not apply to mining in the literal sense, but rather it is a figurative term referring to finding and collecting precious metals.
Bitcoin mining is the process of verifying and adding digital transactions to the blockchain ledger. Miners solve highly complex cryptographic hash puzzles to verify transactions and add them to the Blockchain. Bitcoin uses the Secure Hash Algorithm 256 bit (SHA-256).
In effect, the mining process is creating new units of Bitcoin currency. Miner’s computers on the peer-to-peer network receive a predetermined amount of Bitcoin as a reward for each new unit created.
What is Bitcoin Halving:
So, now we know the basics, it’s time to define Bitcoin Halving. Bitcoin halving is an automated process where the number of BTC entering circulation drops by half, as does the reward for mining them. The supply of Bitcoin is created by miners who receive a predetermined amount of Bitcoin as a reward. When a Bitcoin halving occurs, the block reward given to miners is halved or reduced by 50%.
In effect, halving cuts in half, or reduces by 50%, the rate at which bitcoin units enter into circulation, and it cuts in half the reward miners can get. A Bitcoin halving occurs after 210,000 blocks have been mined, which in calendar time equals approximately every four years.
A quick look at the history of Bitcoin Halving clearly shows how the process works. From 2008 to 2012, miners would receive a reward of 50 BTC per block mined. Then, in 2012 when the first 210,000 blocks had been mined, the reward for miners per block was halved to 25 BTC. This was the first official Bitcoin Halving.
In 2012 the reward per mined block was halved from 25 BTC to 12.5 BTC. Then, in 2020 the reward per mined block was again halved to 6.25 BTC. The halving process was repeated in 2016 and 2020 when the next blocks of 210,000 had been mined.
The Bitcoin Halving process will end when the number of Bitcoin units in circulation reaches 21 million. Analysts estimate this will happen in the year 2140.
The Law of Supply and Demand:
Economists have long recognized the Law of Supply and Demand, and included in that law is the inverse relationship between supply and price. The inverse relationship between supply and price means that as one-factor increases, the other decreases. For example, if demand stays constant and supply decreases, price will increase. Conversely, if demand remains constant and supply increases, price will decrease.
When drawn on a chart, the inverse relationship between supply and price shows that as one-factor changes direction, the other factor changes in the opposite direction.
In the case of Bitcoin, a halving decreases the rate of supply by 50%, which causes a corresponding increase in price. Put another way; a halving means the supply of Bitcoin is lessened, which in turn means the price of Bitcoin is raised.
The first “halving” was in November 2012, the second in July 2016, and the third in May 2020. A halving will occur every 210,000 blocks, which in calendar time is approximately every four years.
Cryptocurrencies are stored on the blockchain, and every ten minutes, a certain number of Bitcoin units or block rewards will enter circulation. When a “halving” occurs, the number of block rewards entering circulation is halved. For example, in the 2020 “Halving,” the number of block rewards entering circulation dropped from 12.5 every ten minutes to 6.5 every ten minutes.
The Supply of Bitcoin.
For conventional currencies, the amount in circulation, or available supply, rises and falls predominantly in response to actions taken by the relevant national central bank. For instance, the Central Bank of America, known as the Federal Reserve Board or Fed for short, controls the money supply through monetary policy.
Monetary policy can include a variety of actions, including printing more money, raising or lowering interest rates, and engaging in “open market operations” such as selling government-backed securities.
Unlike fiat money, Bitcoin is an immutable currency meaning that supply is limited and there can only ever be a predetermined amount of Bitcoin units produced. That predetermined number is 21 million. Currently, slightly over 19 million units have been mined, meaning a balance of just under 2 million is left.
And this is where Halving comes into the picture. Rather than use a central bank to control the available supply, the Bitcoin protocol uses an automated process called Halving.
Bitcoin Halving is an automated supply and issuance mechanism that is transparent in how it works and cannot be controlled by entities other than the unique Bitcoin protocol.
Halving is a process highly valued by Bitcoin proponents and they will cite as a reason for them regarding Bitcoin as a legitimate currency with a store of value.
The Advantages of Bitcoin Halving:
There are several distinct advantages of Bitcoin Halving including the fact that:
- Bitcoin Halving is automated, meaning the process is controlled purely by the code and not by a centralized authority, a government, or other people.
- Bitcoin Halving reduces or decreases the rate at which new units are created and entered into circulation. This is the equivalent of automated monetary policy in the fiat world.
- Bitcoin Halving reduces inflation.
- Bitcoin Halving increases the price/value of individual Bitcoin units.
- Bitcoin Halving is a chance to speculate and gain substantial earnings.
- Bitcoin Halving decreases the mining reward, but the incentive to mine remains because the value of each unit has increased.
A Bitcoin Halving has traditionally been followed by ballooning and then a crash in price. This boom-bust cycle can be very advantageous for speculators who can predict its occurrence and act accordingly before the start of each phase.
It is possible that a Bitcoin Halving does not increase the price, and when this happens, the amount of work required to mine Bitcoin remains the same, yet the mining reward is halved. This creates a situation where miners lose the incentive to mine, which could negatively affect the currency.
If the price of Bitcoin stays the same after a halving, Bitcoin automatically makes the mining process and getting rewards easier. This way, even if the reward value has decreased and the price remains static, there is still an incentive for the miners.
Conclusion:
Bitcoin miners engage in mining which adds new blocks to the blockchain ledger, and new blocks are added/mined every ten minutes. After adding /mining blocks, miners are rewarded with 6.5 units of Bitcoin.
A Bitcoin Halving is an automated process programmed into the Bitcoin code, whereby the supply of Bitcoin and the reward given to Bitcoin miners is halved. This process results in a decrease in supply and an increase in demand and price.
A Bitcoin Halving is a pivotal moment for Bitcoin currency traders because it directly affects the supply and, therefore, the price of Bitcoin. Furthermore, because Bitcoin Halving is an automated process, it is possible to determine when it will occur and take appropriate action. In short, Bitcoin Halving is a process that offers Bitcoin investors a chance to speculate and make substantial gains.
https://www.coindesk.com/learn/bitcoin-halving-explained/
https://www.investopedia.com/terms/s/satoshi-nakamoto.asp
