The Bitcoin Halving & What it means
On May 11, 2020, the reward for bitcoin miners will be halved for the third time in its history–the reward decreasing to 6.25 BTC per block. Roughly every 3.5–4 years, after 210,000 blocks are mined, the bitcoin reward decreases by 50%. When Bitcoin first appeared in January 2009, the mining reward was 50 BTC, then cut in half to 25 BTC in 2012, and again in 2017 to 12.5 BTC.
This means that on May 11th, the issuance of new coins will be 6.25 BTC every 7–10 minutes when a miner verifies the next block of transactions.
While most people focus on the microeconomic factor, the reward is cut in half, we like to think of this quadrennial event as a reminder that the supply of bitcoin is limited. It’s a macroeconomic view, but it’s important. On the 12th, the annual supply of bitcoins decreases from 3.7% to 1.8% with over 87% of the total bitcoins mined. This is why bitcoin is called digital gold and considered a scarce asset.
What is Mining?
Issuing bitcoins is the last step in a long process. A bitcoin is made solely through verifying transactions on the blockchain. Mining is the action that computers perform to verify the blockchain. Let’s break that down.
Miners are computers with a lot of computational power that solve very complex math problems called hash puzzles. The goal of the miner is to solve the puzzle the fastest out of the group. Whichever miner solves the problem the quickest, verifies the next block of transactions added to the blockchain. Miners do this job to prove that the transactions on the blockchain are valid. If a transaction is not valid, it is rejected. Once all the transactions are verified and added to the blockchain, the miner is rewarded with bitcoins. This verification and reward system is called proof-of-work (PoW).
When bitcoin first began, it was possible to mine directly from your personal computer. However, now mining bitcoin requires many computers with lots of computing power, all working on the hash puzzles together called mining pools.
Today, mining pools have become popular because anyone with some extra computing power can join the network and mine cryptocurrency with other computers. This is the most efficient method for mining if you don’t own a warehouse full of computers.
Why is bitcoin a deflationary currency?
Before its inception, the Bitcoin blockchain had rules coded into it, including the 4-year mining reward halving.
Some of the rules coded into the Bitcoin blockchain from the beginning are:
- Bitcoin uses the proof-of-work mechanism to add blocks to the blockchain
- Bitcoin has a controlled supply of 21 million BTC
- Every 210,000 blocks, the mining reward will be cut in half called the “halving”.
Because of the rules programmed into the Bitcoin blockchain from the beginning, bitcoin is a scarce digital asset–only 21 million will ever exist–as well as a deflationary currency. While some people argue that what makes bitcoin valuable is that it is a deflationary currency–that the supply depreciates over time. However, its value is that neither a government nor a bank can control bitcoin and pull the supply levers at their own will like they can with a fiat currency. Controlling the monetary supply levers can be dangerous and drive an economy into hyperinflation and completely devalue a nation’s currency. However, this deflationary aspect removes the possibility of devaluing existing coins by creating more.
Bitcoin Stats:
- Total bitcoins in circulation: 18,361,513
- Total bitcoins to ever be produced: 21,000,000
- Percentage of bitcoins mined: 87.44%
- Total bitcoins left to be mined: 2,638,488
- Last fraction of BTC mined: The year 2140
Conclusion
The quadrennial halving event reminds us that bitcoin is a scarce resource and that the supply is limited. The annual supply of BTC reduces from 3.7% to 1.8% and over 87% of all bitcoins that will exist have already been issued. During the halving, the price of bitcoin historically appreciates as more people understand the value of a decentralized currency.
Check out our Halving Countdown Clock
