Bitcoin halving? What does it entail?
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Before we go deeper into the effects of bitcoin halving, let’s take a look at some basic concepts pertaining to bitcoin mining. Upon the creation of a new transaction, the information is sent to all the other nodes present on bitcoin’s network along with the ones making contributions to the overall mining process. The information of these transactions are stored locally, and miners get rewarded for publishing this block of a transaction on the blockchain. In order to do this, miners have to contribute their computing power so as to solve a challenge requiring high processing power. The reward that a miner gets for successfully publishing a transaction depends on the block reward. Currently, the block reward is set at 12.5 BTC.
While many people do know about mining or can easily learn about it from various sources, they do wonder what the hell halving is whenever they come across the term ‘bitcoin halving’. The main purpose of this guide is to provide an answer to this question!
What is Bitcoin halving?
Since the time that Bitcoin has been on the market, it has been following a code that was written many years back- almost a decade ago. One of the reasons why bitcoins are highly valuable is the limited supply of bitcoins which is 21 Million. Hence, it works in a similar way as resources such as gold do.
Before heading on to the formal definition of halving, let us consider the two factors that affect the rewards. To make things somewhat competitive, the code of bitcoin was written in a way so as to make miners compete with each other for the reward. Hence, the greater the number of miners there are on a network, the more difficult it is for a single miner to win. With an increase in the competition, miners tend to make use of greater processing power hence ruling out the likelihood of anyone making a profit simply through the use of a regular computer. Nowadays, bitcoin mining requires the processing power of whole data centers.
What is the second factor? Well, this is where the definition of halving lies. According to the code behind bitcoin’s operation, the reward of mining a block successfully gets cut in half after every 210000 blocks are mined.
The event when the mining reward is cut in half is known as bitcoin halving. This reward is always split into two equal halves. So for instance, if the Bitcoin reward of mining a block is currently set at 12.5 Bitcoins, it would be cut in half in the next halving event which would be equal to 6.25 Bitcoins per block.
A halving event does not just come and go for the records. In fact, it has a significant role to play in determining the rise or fall of the cryptocurrency. Nevertheless, for many people especially the ones running an older grade equipment, the bitcoin halving event is certainly not a happy one.
Is halving necessary?
The halving event pretty much simulates assets such as diamonds and gold that do not work like the fiat currency. After all, the total amount of gold and diamonds in the world is almost fixed. Hence, their value depends on how much of these commodities are available in the world.
A halving event also preserves the value of the cryptocurrency since there is a limited supply of Bitcoins after all. At the same time, a halving event generally means that many miners with older setups might not make substantial profits anymore. This would lead them towards shutting their equipment off. According to Lingham, a halving event would shut off approximately 25% of the mining rigs. In case a majority of miners shut off their equipment, the price of the Bitcoins would likely drop. However, this seems unlikely to happen.
This is primarily because many older grade mining setups that will not remain economically viable after the halving, will go offline permanently and leave the network. As they leave the network, the overall computing power at present on the network will reduce. According to many cryptocurrency experts, a sudden drop in the bitcoin network’s hashrate means that the transaction confirmations would take more time, which could perhaps lower the price of the bitcoins for a short period of time. As a result of this, perhaps even more miners will shut their mining equipment off as they would not be making enough profits, and this cycle could continue until bitcoin’s doom.
The last halving event resulted in a drop of 20% of the hashrate!
Next Bitcoin halving
The estimated date for the next Bitcoin halving event is 31 May 2020. Currently, the block reward for Bitcoins today is set at 12.5, with each block containing 2500 transactions in general. After the next halving event, this block reward will be halved to 6.25 Bitcoins per block.
As experienced earlier, the price of Bitcoins is expected to rise in the next halving event. Since a halving event means that there are a lesser number of Bitcoins left to mine, miners will be struggling and competing with each other like never before. With transactions taking more time, if the supply gets shorter in the market while the demand remains constant, the prices of Bitcoin will certainly go up high in the long run. This would only be possible provided that the majority of miners do not shut their equipment off due to the increase in mining expenses (quite unlikely to happen).
Apart from an increase in the price, one can also expect the popularity of mining bitcoins to go down significantly. This is because there will be a small fraction of people that can own industrial-scale mining setups, so as to make some real profits without getting a loss for the high electricity costs. These industrial grade setups could alone be worth a couple of million dollars, minus the massive electricity costs.
Even though halving is an event that is not very well cherished among the mining communities, the representatives of the bitcoin mining community including Jihan Wu and Valery Vavilov are quite optimistic that as of now, there won’t be enough negative change other than a drop in the hashrate in the next halving event.
One interesting fact to notice is that after the halving event, even though the bitcoin reward for each block would be cut in half, a miner may still receive a bigger value in terms of USD as compared to last year. This is because the bitcoin price has nearly been quadrupled as compared to last year.
Halving events until now:
28th November 2012 (First Bitcoin halving)
- Price before: $12
- Price after: There was no significant effect on the price.
- Reward: The mining reward was cut from 50 BTC to 25 BTC.
Influence on the market: This was the first halving event ever in the history of Bitcoin. However, the Bitcoin market at that time used to have a totally different environment. Since Bitcoins were not much popular anyway, the halving event had an overall negligible impact on the market and on the mining community. The reward, however, was cut from 50 BTC to 25 BTC which is quite a huge difference. The price of Bitcoin did not really go up until the mid of 2013 after the first halving event. Hence, the price increase was not immediate and took a good couple of months. This indicates that the 2012 halving event was not the prime cause of the slight price increase in 2013.
9th July 2016 (Second Bitcoin halving)
- Price before: $650
- Price after: $675
- Reward: The mining reward was cut from 25 BTC to 12.5 BTC.
Influence on the market: This was the second halving Bitcoin event. Quite surprisingly, there was no substantial increase in the Bitcoin price. Before the halving event, the price was still at around $650. After the halving event on 9th July 2016, the price slightly increased up to $675. While it was predicted that the hashrate would drop as much as 5 to 10 percent, there was hardly any noticeable change. In fact, the hashrate drop turned out to be even less than 1%. However, it is quite interesting to note that there was quite some volatility in price noticeable before the halving. The Bitcoin exchange rate had a drop of more than $30 taking the price down to $630 from $660. Until the BTC halving even itself, the price had stabilized at $650.
In a Nutshell
Halving is an event where the reward for mining a single block is halved, based on the original reward. So in case, the reward was originally set at 50 BTC, it would stand at 25 BTC after the halving event. Currently, the block reward for BTC is set at 12.5 which will become 6.25 after the next halving event which is expected in May 2020.
A halving event could filter out a good fraction of people using older mining setups, as they would not be able to make substantial profits. This is because more computational power will be required due to an increase in the difficulty. This is quite off-putting for many people in the mining community. However, most of the miners see it as something that is absolutely necessary for the preserving the value of BTC while comparing it with limited commodities like Gold and Diamond.
We hope to have provided you all the information regarding halving that you were looking for. To learn more about cryptocurrencies and crypto trading, feel free to check out other sections of our website.