Here’s what it means: Currently, when miners add a new block to the Bitcoin blockchain, they receive 12.5 BTC as a reward. But by the end of May 2020, that reward will shrink by half. This means instead of 12.5 BTC, miners will get only 6.25 BTC for every block they add to the Bitcoin blockchain.
This event is what people in the crypto world call the ‘Bitcoin Halving’.
It occurs every time 210,000 bitcoins are mined – or every four years. And if you have invested money into Bitcoin, or plan to do so in the near future, this event can have a major impact on your next move.
In this article, we’ll show you in detail what Bitcoin halving is, why it happens and why this is one of the most important events in the crypto industry.
How is Bitcoin ‘produced’?
Before you can understand how and why Bitcoin halving happens, you need to know how the Bitcoin cryptocurrency is produced in the first place.
There will be 21 million bitcoins only.
Traditional paper currency has no limit to how much it can be printed but Bitcoin does. Its creator, Satoshi Nakamoto, has set the limit that there can only be 21 million bitcoins produced – and not a single Bitcoin more.
Bitcoins have to be mined.
Bitcoin exists on the blockchain network, which is a digital ledger that keeps track of how much Bitcoin is circulating in the system – and who owns them.
And here is what’s interesting:
Not all of the 21 million bitcoins are circulating on the blockchain network for people to buy. Instead, before someone can buy Bitcoin, it first has to be mined. After a ‘miner’ mines bitcoins, only then can people buy or sell it…
Miners can mine only a limited amount of Bitcoin at a time.
Satoshi Nakamoto didn’t just place a limit on how much Bitcoin can be produced, he also set a limit on how much Bitcoin can be produced at a given time.
This means miners can’t just mine all of the 21 million bitcoins in a day, a week or even a year. Instead, miners can only mine a pre-set amount of Bitcoin at a given time.
To understand why this is the case, let’s briefly take a look at how Bitcoin is mined:
- When someone buys or sells Bitcoin, the transaction has to be confirmed on the blockchain network. Only then can the bitcoins move from the seller to the buyer.
- A transaction is confirmed only when its details are recorded on a new block in the blockchain.
- Miners, who have extremely powerful computers, compete to solve complex mathematical problems based on a cryptographic hash algorithm.
- Once a miner solves the problem i.e. ‘hash’ on the blockchain network, it results in the creation of a new ‘block’ on which the transaction is recorded. Once this happens, the bitcoins move from the seller to the buyer.
- Since the miner used their resources to successfully create the new block, they are given a specific amount of Bitcoin as a reward.
There is an (increasing) limit on the reward miners get.
When Bitcoin was launched in 2009, each miner was given 50 BTC as a reward for solving a hash and adding a new block to a blockchain.
But Satoshi Nakamoto, the creator of blockchain, set up a system which decreases the Bitcoin reward when one of these two events happen:
- When miners mine 210,000 BTC.
- When a duration of 48 months passed.
Every time one of these two things happen, the reward miners get is reduced into half. The first halving event took place in November 2012, in which the reward reduced from 50 bitcoins to 25. The second halving event took place four years later in July 2016, in which the reward reduced from 25 bitcoins to 12.5. And the upcoming halving event is also set to take place approximately four years later in May 2020, when the reward will further reduce into half to 6.25 bitcoins.
Why does ‘Bitcoin halving’ take place?
Near the start of this article, we mentioned how fiat (paper-based) currencies don’t have any limits to their production.
The result of this is inflation, which devalues that particular currency. And therefore, its purchasing power weakens over time.
Inflation has affected every currency in the world, including powerful ones like the dollar and euro, which have become inflated over time. For example, if you earned 100 USD in 1980, in 2017, thanks to inflation, that same 100 USD note would be worth just 29.83 USD.
Bitcoin solves the inflation problem using the ‘halving event’.
Satoshi Nakamoto didn’t want Bitcoin to suffer from the kind of inflation traditional currencies face. So he took two measures to safeguard Bitcoin against it.
- He set a limit to the number of bitcoins that will exist.
- He controlled supply from the start by restricting mining using the halving event.
If he didn’t take these two measures, there would be no way of stopping Bitcoin from inflating. People would just keep on mining bitcoins until it got devalued so much that it essentially became nearly worthless.
But because both its quantity and supply is limited, Bitcoin has successfully avoided inflation. In fact, until now, Bitcoin has successfully experienced deflation, and the cryptocurrency, while extremely volatile, has generally experienced a massive increase in value. It was worth basically nothing in 2009. Today, 10 years later, it is now worth 3000+ USD.
What will happen during the next halving event?
The honest answer is that nobody knows.
But they say history repeats itself. So let’s take a look at what happened during the last two halving events.
According to this chart on Forbes.com, you can see that during both halving events, the price of Bitcoin increased in value. And more importantly, after both halving events happened, Bitcoin’s price never decreased below to what it was before the halving events took place.
With these facts, we can cautiously assume that a similar jump in Bitcoin’s price will take place after May 2019 as well. But again, this is just massive speculation on our part.
It’s up to you to guess what will happen – and whether to HODL your Bitcoin or not. But if the past is any indicator, that’s exactly what you should do!