Bitcoin halving will be one of the most prominent cryptocurrency-related events of 2020. When it happens, the difficulty of BTC mining will increase and block reward will reduce by half. This article explains what Bitcoin halving is and how it affects BTC price in the short and long run.
Read it to know what to expect!
TABLE OF CONTENTS
What is Bitcoin Halving: Definition
Let’s start with a BTC halving definition.
Block halving refers to the moment when a miner’s reward for solving a new block reduces by half. That’s why they call it halving.
When is halving expected? It is a planned event that happens every time 210,000 blocks are mined. Let’s do some math: it takes about 10 min to mine a BTC block, therefore halving takes place every 4 years. When all 21 million BTCs are put into circulation, there will be no more halvings and no more rewards.
To explain how BTC halving works, we have to deal with the following questions:
- Where new BTC come from;
- What mining reward is and why it gets smaller every 4 years;
- Why halving mechanism is necessary;
- When halving is expected;
- What the consequences of BTC halving for miners and investors are.
How New Bitcoins emerge
We will start with the process of new coins issuance, as it helps to understand the halving mechanism.
Limited Supply Explained
In the case of traditional currencies, new coins and notes appear when the government starts a printing press. Therefore, there’s no such thing as limited supply: if a country needs more money, it can create it anytime. As a result, the urgent problem is solved, but the citizens’ savings lose part of their values due to inflation.
If we deal with Bitcoin or another cryptocurrency, its supply is normally limited. There are some exceptions to this rule, but usually, we know how many digital coins are available.
For instance, the total Bitcoin supply is 21,000,000 BTC. The currency protocol determines this number, and no one can change it. Moreover, these BTCs cannot come into circulation all at once. Miners, who issue new coins, do at a predictable speed. Every 10 min some of them solves a new block and gets a reward in newly-issued coins.
This term stands for a certain amount of BTC the lucky miner receives when he solves a block. A reward is important to motivate miners to provide their computing power and other resources for solving complicated math puzzles. This process is essential for validating and adding new transactions to the blockchain. To understand how it all works, read our cryptocurrency and blockchain guides.
Currently, the reward per block in the Bitcoin network is 12.5 BTC. This amount comes into circulation with every new block solved. The reward used to be much bigger before the first halving occurred in 2012.
Bitcoin Halving: History
It would be useful to have a look at BTC’s past and future halving events.
- November 2012. The original reward of 50 BTC reduces to 25 BTC.
- July 2016. It gets even smaller – 12.5 BTC.
- May 2020. Approximately on May 18, this amount will turn into 6.25 BTC.
If all goes to plan, miners will release the last BTC in 2140. When it happens, there will be no more rewards, only the fees for transaction processing.
It sounds discouraging, as today’s transaction fees are tiny compared to the block reward. But this situation may change by the time the last halving takes place. Transaction fees are likely to get bigger: after all, without reward it will be the only way to make miners work. Besides, the value of the coin itself may rise, as the demand for it increases.
Bitcoin Halving: Why It Is Necessary
Before we tell you what to expect after the next Bitcoin halving, let’s see why it takes place.
Let’s get back to good old paper money again. As we said, there is no limit to their production, and it leads to inflation. The currency loses a part of its value and purchasing power. Sad but true, this process has affected every currency in the world, including the dollar and euro.
A halving event is one of the mechanisms Satoshi Nakamoto invented to solve the inflation problem. It aimed to control the supply of the coins by restricting miners. If he didn’t limit the supply and didn’t restrict mining activity, BTC would be devalued, finally.
Due to these two measures (halving and limited total supply) the first crypto managed to avoid inflation.
What Halving Means For Miners
At first glance, a halving event should be 100% bad for the community of miners. Nobody likes receiving less money for the same work.
It’s not exactly the case. As we said earlier, cryptocurrency is different from fiat money. When your salary in dollars is halved, it’s a disaster, but Bitcoin is another thing.
On one hand, miners will be receiving fewer coins. On the other hand, these coins will be more valuable, according to the market law of demand and supply. Therefore, miners will still get sufficient compensation for what they do.
Besides, there are some measures they can take to stay profitable.
First, miners can use hardware that consumes less energy. There are new ASIC models like Antminer S9 that are rather energy-efficient.
Second, they can relocate to an area with cheaper electricity and a colder climate. Siberia is one of the best options here: it has big hydropower plants and naturally cold temperatures for much of the year.
What Halving Means For Crypto Investors
For investors, the upcoming halving is also important as it may influence the value of BTC. The previous two events led to increasing the demand for the coin and its price. For example, the 2nd halving that took place in 2016, resulted in impressive price growth. The market value of BTC grew by 2,800% in 1,5 years after the mining reward fell to 12.5 BTC.
How these smaller rewards/higher prices correlate? It’s easy to explain. Most miners sell their rewards right after they get them, to cover the expenses. Accordingly, when this reward is halved, fewer new coins enter the market. It makes bitcoins more scarce, more wanted, and more expensive.
Considering this, most investors are looking forward to May 2020. If history repeats itself, it will be a great opportunity to make multiple profits. Some skeptics argue that this halving will be different from the previous ones. Now the crypto market is getting mature and you shouldn’t expect dramatic price leaps, they say.
Bitcoin Halving Consequences: Overview
So, what will happen when BTC halves in a couple of months or so? There are several consequences to anticipate.
In the short term, we may expect a negative impact on Bitcoin mining. History teaches us that when a halving occurs, the hash rate of the network gets lower for a time. It means many miners stop working as it becomes less profitable. It’s especially true for small operators with lower mining efficiency. In contrast, the global players, like big mining pools, may strengthen their positions in the market. Theoretically, these ‘cartels’ may use their superpowers for the so-called 51% attack.
Many experts agree that, though mining will become less profitable after May 2020, all will depend on the price of the coin. Anyway, this price is unlikely to double and compensate for the halving. Jimmy Nguyen, the president of the Bitcoin Association, is sure that that there won’t be any ‘magical increase to help cover the 50% fewer coins’.
As we mentioned earlier, many BTC users and investors expect the price of the coin to skyrocket. It happened after each of the two previous halvings. So, should we expect the same thing after May 2020?
Well, it’s hard to tell. Note that the second Bitcoin halving in 2016 did not cause such a significant price rise as the first one. Experts explain that as many people were anticipating the price rise, the demand for Bitcoin grew even before the halving took place. Thus, the price grew up in advance and didn’t change much after the event.
The same factor may apply to the upcoming halving, too. Besides, the number of bitcoins traded today is tiny compared to the number of bitcoins mined. Even if the block rewards reduces by half, it will make no significant difference for the market, leaving the price of BTC more or less stable.
Bitcoin Halving: Conclusion
You may like or dislike Bitcoin halving, but it’s an essential part of Satoshi’s protocol. This mechanism ensures that cryptocurrency is resistant to inflation and keeps its value.
It’s still hard to predict how the future halving will influence the crypto market, but it needs to be done.