What is Bitcoin Halving

The last half of Bitcoin occurred on May 11, 2020, and the next half is likely to occur in 2024. What is the halving, how does it affect price, what does it mean for miners, and the long-term outlook for the cryptocurrency? Here is everything you need to know.

"The Halfinning" sounds like a horror movie about an ax murderer. But it is actually one of the most anticipated events in the history of Bitcoin.

In May 2020, the number of bitcoins (BTC) entering the trade every 10 minutes (known as block rewards) was cut in half, to 6.25 from 12.5. It's a milestone that was easy to see coming because it happens every four years and it happened twice before 2020.

It is the potential pull of fortune that draws attention to the upcoming event, more commonly known as the half (some clowns like to add an "in" to make it look sinister). The amount of supply entering the system will suddenly drop, but the demand will, in theory, remain the same, which could cause the price of the cryptocurrency to rise. As such, the event has inspired an emotional debate about Bitcoin's price predictions and how the market will respond.

"The theory is that there would be fewer bitcoins available to buy if miners had less to sell," said Michael Dubrovsky, co-founder of the non-profit PoWx Foundation for Research and Development.

But the cyclical decline in Bitcoin's minting rate may have a deeper meaning than any short-term price movement for the coin to trade. The block reward is an important component of Bitcoin and one that ensures the security of this unitless system. As the rewards drop to zero over the next few decades, this could destabilize the economic incentives underlying Bitcoin's safety.

For those trying to understand this complex topic, CoinDesk offers the following explanation for the third half of Bitcoin.

What is bitcoin halving?

The new Bitcoins are entering circulation as group bonds, produced by "miners" who use expensive electronic equipment to earn or "mine" them.

Every 210,000 blocks, or roughly every four years, the total amount of bitcoins that miners can earn is cut in half.

In 2009, the system started with 50 coins mined every 10 minutes. Subsequently, 12.5 Bitcoins are exchanged every 10 minutes.

This process will end with a total of 21 million coins, possibly in the year 2140.

Who chose the Bitcoin distribution program? why?

Satoshi Nakamoto, the creator of Bitcoin named by his pseudonym, who may have been an individual or a team, disappeared almost a year after the program was released to the world. Hence, he or they (we'll just go with "them" from now on) are no longer there to explain why they chose this specific formula to add new Bitcoin to trading.

But the first few emails from Nakamoto shed some light on this mysterious person's thinking.

Shortly after the Bitcoin White Paper was published, Nakamoto summed up the different ways they chose monetary policy (the table by which miners would receive block rewards), contemplating the conditions under which they could lead to deflation (when the purchasing power of the currency increases Inflation (when the prices of the goods and services that can be purchased increase with the increase of the currency).

At the time, Nakamoto couldn't say how many people (if any) would use the new money online.

They explain very little why they chose the specific formula they chose: "The coins must be distributed at the beginning in some way, and a flat fee seems to be the best formula."

In most state-issued currencies, the central bank, such as the United States Federal Reserve, has tools at its disposal that allow you to add or remove dollars from circulation. If the economy falters, for example, the Fed could increase circulation and encourage lending by buying securities from banks. Alternatively, if the Fed wanted to pull the dollar out of the economy, it could sell securities from its account.

For better or for worse, Bitcoin is slightly different. On the one hand, the supply schedule has become completely fixed.

Unlike the monetary policy of state-issued currencies, which is developed through political processes and human institutions, Bitcoin's monetary policy is written in a code shared across the network. Changing them requires massive results of coordination and agreement across the entire bitcoin user community.

"Unlike most national currencies we know as the dollar or the euro, Bitcoin is designed with a fixed supply and a predictable inflation schedule. There will only be 21 million Bitcoins. This predetermined number makes them scarce, and this is it. scarcity combined with its utility which strongly influences its market capitalization, ”the cryptocurrency wallet company Blockchain.com wrote in a blog post before the 2016 semester.

Another unique aspect of Bitcoin is that Nakamoto schedules the block reward to reduce it over time. This is another way that it differs from the norm in modern financial systems, in which central banks control the money supply. In stark contrast to the half bitcoin bonus, the dollar supply has almost tripled since 2000.

Nakamoto left evidence that they created Bitcoin for political reasons. The first block of Bitcoin shows the title of a newspaper article: "The Times 03 / Jan / 2009 Chancellor is on the verge of a second bank bailout."

Much has come to be construed as a sign of Nakamoto's political beliefs and goals. If widely adopted, Bitcoin will likely reduce power banks and governments with monetary policy, including bailouts of failing institutions. As explained in the block reward, no central entity can create Bitcoin outside of strict hours.

How does halving affect the price of Bitcoin?

Halving Bitcoin gets a lot of attention mainly because many believe it will lead to a rise in prices. The truth is that nobody knows what will happen.

Bitcoin has seen two halves so far, and they can be seen as a precedent.

The 2012 semester featured the first demonstration of how markets are responding to Nakamoto's unconventional sourcing program. Until then, the bitcoin community didn't know how the sudden drop in rewards would affect the network. It turns out that the price started to rise shortly after the halving.

The second half of 2016 was highly anticipated, as it is now, with CoinDesk running a live events blog and Blockchain.com setting a 'countdown'. The halving encouraged strong speculation about how the event would affect the price of Bitcoin.

On July 16, 2016, the day of the second half, the price dropped 10 percent to $ 610, but then returned to where it was before. There was little evidence that the sudden drop in the minting rate of bitcoins had a long-term effect on the price. At the time, CoinDesk's Jacob Donnelly even described the event as a "boring test."

While the immediate effect on the price of bitcoin was small, the market saw a gradual rise over the year following the second half. Some argue that this increase was a late result of the semester. The theory is that when the supply of bitcoin decreases, the demand for bitcoin will remain the same, causing the price to rise. If this theory is correct, then we can observe similar price increases after halving in the future, including the increase scheduled for this year.

Others argue that since the timing of Bitcoin can be cut in half, this change in the minting rate is unlikely to alter the price. Traders have known for a long time that their reward per block of bitcoins will decrease, giving them plenty of time to prepare.

It's possible that if enough people knew about the halving beforehand, they would buy bitcoins ahead of time, raising the price before the halving rather than after. This is what people mean when they argue that half has a price.

Why do miners get these bonuses?

Bitcoin would never work without these block rewards.

As independent researcher Hasu's pseudonym said, there are two parts to making Bitcoin work. Hasu told CoinDesk: “The Bitcoin ledger case should answer the question 'Who owns what and when? "

Part One "Who Owns What?" It is solved by encryption. Only the owner of the private key (which looks like a secret passcode) can spend Bitcoin.

Hasu explained that "the second half (" when? ") Is the big unsolved challenge before Bitcoin. Other than that, it's easy for people to" double-spend "their coins, making money out of nowhere.

Without block bonuses, the grid would be a mess. Hasu explains that if they had enough computing power, the miners could attack the network in two ways: doubling the spending of coins or blocking the passage of transactions. But they are highly motivated not to try either, because then they may risk losing their collective rewards.

"The game theory that Bitcoin secures requires that a) miners have an incentive to mine honest blocks [and] b) miners bear a cost ... for trying to cheat," Dubrovsky said.

In other words, miners will lose money if they don't follow the rules.

The more miners there are in computing for Bitcoin, the harder it is to attack them because the attacker would need a large part of that processing power, known as hashing, to carry out such an attack.

The more money they can earn through collective rewards, the more powerful Bitcoin mining will be, and therefore the more secure the network will be.