What is Bitcoin Halving and Will It Affect Bitcoin’s Price?
The terms “bitcoin” and “blockchain” are no longer strange words to many people like they were a couple of years ago. But for the noobs still trying to get acquainted with the words, we will get to briefly explain a bit about them. Now, bitcoin is a digital currency and not your conventional physical currency that you can grab, spend, or save in a bank. Based on how bitcoin was programmed, there are a few events that affect it and one of them is the bitcoin halving which takes place once every four years.
To understand the bitcoin halving, we need to understand the concept of the blockchain, which bitcoin operates on, as well as bitcoin mining.
The blockchain is simply a shared ledger that stores the origin of a digital asset. Basically, in bitcoin’s case, it records data from a sender, receiver, and the amount of money sent in a transaction. So, each block contains the information from a transaction and it is linked together to other blocks by a chain. A network of different computers from around the globe is responsible for verifying the transactions on the blockchain through what is referred to as mining. Blockchain is used today by several corporations and in different ways. It is predicted that it will form a major part of our future in years to come just like the advent of the email a couple of decades ago.
Bitcoin mining is basically how the blocks of transactions get verified. It is not done like your conventional mining of minerals like gold that may require tools like pickaxes or shovels or even drilling machines. Mining bitcoin relies on computing power to verify transactions. Miners are groups of people that use computing power from their computers to maintain the ledgers and verify the blocks and ensuring the information transferred is accurate. These miners are rewarded for their efforts by receiving bitcoin and fees from the transaction.
Bitcoin was created by a certain computer programmer who went by the pseudonym “Satoshi Nakamoto” back in 2009. He designed bitcoin to mirror the characteristics of gold. Just like bitcoin, mining gold takes time, from setting up the mining equipment to the electricity supply required to mine each bitcoin. This is one aspect of bitcoin that makes it expensive. Another aspect of it is that it has a limited supply, unlike common physical currencies that can be minted as many times as possible. Bitcoin is programmed to have a maximum supply of 21 million bitcoins when it is mined and so far, there are currently 18 million bitcoins in circulation. Satoshi aimed to create a deflationary currency, hence the fixed supply, meaning that over time, bitcoin’s purchasing power will increase compared to fiat or physical currencies that are inflationary.
Now that we have understood blockchain and bitcoin mining, let’s discuss bitcoin halving. Bitcoin halving is basically a reduction in each block’s reward by 50% after every four years or more accurately, every 210,000 blocks mined. Each block takes around 10 minutes to verify and when the math is done, it takes approximately 3.99 years (four years, more or less) for 210,000 blocks to be mined. Remember, we mentioned that miners receive rewards in bitcoin and transaction fees. During Bitcoin’s inception back in 2009, the reward for mining each block of bitcoin was 50 bitcoins. Every four years after that, this reward was halved thus, in 2013, it became 25 bitcoins, in 2017, it was 12.5 bitcoins. This year, 2020, the reward has been halved once again to 6.25 bitcoins per block mined, and by the year 2024, it will be halved once more with the miners’ reward expected to be slashed to 3.12 bitcoins.
What’s the deal with the halving?
Well, remember we mentioned that Satoshi was trying to create a deflationary currency in bitcoin. So, he programmed bitcoin to guard against inflation by minimizing the buying power of the miners. He understood that technology improves over time and miners would be able to mine more blocks faster which would ultimately increase the supply of bitcoin much quicker than before. Before this latest halving, around 1800 BTC were mined daily which gave an inflation rate of about 3.8%. After the halving, currently, we now have around 900 BTC mined daily thereby reducing the inflation rate to about 1.9%. This automatically controls the circulation of money at a period of time, unlike fiat currency that gets printed in periods of economic distress.
How it affects bitcoin’s price When we take a look at the historical charts of bitcoin after every halving since 2009, bitcoin typically hits a new all-time high in price within 1 and a half years. That said, it is safe to say that bitcoin may repeat that trend although no one can tell accurately when that will be. Some people are even predicting that bitcoin will hit the price of $533,000 by August 2021. Well, we don’t know how true this is until then but it would be wise to start keeping bitcoins in your wallet as the price might start going up anytime from now. Remember that investing in cryptocurrency is risky so, do due diligence and invest responsibly.