Bitcoin Halving

How does Bitcoin Halving work?

The last halving of bitcoin took place on 11 May. May 2020, with the next one expected in 2024. – but what exactly is halving, how do we translate it into Croatian, how does it affect the price of cryptocurrency and what does it mean for miners? Find out in our new blog. Bitcoin halving, or as they would say in Croatia – the “halving” of bitcoin, is the name for one of the most important events in the history of Bitcoin.

In May 2020. The number of bitcoins (BTC) going into circulation every 10 minutes – known as block rewards, fell by half – from 12.5 to 6.25. Halving occurs repetitively every 210,000 blocks, which is approximately every four years, and before 2020. – happened twice. As the expected growth in value is associated with bitcoin halving, this event is closely monitored and awaited. Namely, halving reduces the number of new bitcoins entering circulation, while demand, in theory – remains the same. In the long run, this affects the growth of the value of bitcoin.

Halving in a couple of points

  • New bitcoins enter circulation as rewards for blocks, produced by the efforts of “miners” who use electronic equipment to earn or “mine” them;
  • Approximately every four years, the total number of bitcoins miners can potentially win halves;
    2009. the system rewarded successful miners with a reward of 50 bitcoins every 10 minutes;
  • Three halves later, the reward dropped to 6.25 bitcoins paid out every 10 minutes;
  • The process will end when the number of bitcoins in circulation reaches 21 million;
  • It is a popular estimate that this will happen somewhere around 2140. (Various sources ï¿1/2 12/12/ 03/ 03/ 03) halving.

What is expected from the next halving?

There are many predictions about how the next halving will affect the value of this cryptocurrency. It depends on the halving itself, but also on the response of the market. According to the co-founder of PoWx – a non-profit crypto research organization – there will be fewer bitcoins available for purchase, in case miners have less to sell. Certainly, the periodic decline in the bitcoin minting rate (eng. Minting rate) could have a deeper significance for the functioning of this cryptocurrency – except for the short-term price increase. We must not forget that the blockchain reward is an important component of Bitcoin, and has the role of maintaining the security of this system without a central leader. As the award decreases in the coming decades, this will inevitably affect the functioning of the reward process itself.

How will halving affect the price of bitcoin?

The halving of bitcoin attracts so much attention mainly because many believe it will lead to an increase in price. The truth is that basically no one knows what’s really going to happen.

Bitcoin has seen three halves so far:

The 2012 halving showed how markets would respond to Nakamoto’s supply schedule. Until then, the Bitcoin community didn’t know how a sharp drop in rewards would affect the network. As it turned out then – the price began to rise shortly after the halving. The second halving of 2016 was expected, live was followed, and Blockchain.com introduced a “countdown” as well. Each halving has fueled strong speculation about how the event will affect the price of bitcoin. Day 16 July 2016, the day of the second halving, the price fell 10 percent to $610 but then returned to pre-halving levels. Although the impact of halving on the price was initially small – the market at the end of the year still showed reactions caused by the second halving. Some argue that the resulting increase in the value of bitcoin is actually a delayed result. Delayed effect of halving. The basic premise is that when bitcoin supply declines, the demand for bitcoin remains the same, pushing the price upwards. If we look at the price of bitcoin 365 days after the second halving, we can see that it has risen by 284%. If we look back at the latest halving, we can also see that the price of bitcoin continued to rise throughout the year, but this time the increase was of over 559%.

Who chose the Bitcoin distribution schedule?

The creators of Bitcoin under the pseudonym Satoshi Nakamoto disappeared about a year after Bitcoin was released into the world. Although we are talking in the plural, it is possible that it was also about the individual. Today, the creator or creators are not there to explain why they chose this formula for adding new bitcoins to circulation, but the first e-mails sent by the Nakamoto group, still reveal something to us. Shortly after the publication of Bitcoin’s “White Paper,” Nakamoto summarized the different ways in which their monetary policy could take place, that is, the schedule by which miners receive rewards for blocks. During development, they took into account the circumstances in which their policy could lead to deflation (when the purchasing power of the currency increases) or inflation (when the prices of goods and services that can be purchased with currency rise).

Either way – Nakamoto couldn’t have guessed then how many people would start using the new digital money. Also, there was a chance that no one would start using it. Of the overall communication, it is very little worked out why they chose the formula they chose, but we know this with certainty: “Coins somehow have to be initially distributed, and a constant rate seems like the best formula” – Satoshi Nakamoto.

Why do miners get rewards?

mining

Bitcoin could not function without block rewards. As pseudonymous independent researcher Hasu said, there are prerequisites for the functioning of Bitcoin. The prerequisites deal with possession and answer the question – “who owns what and when?”, and are solved by cryptography. Only the owner of a private key, which is like a secret access code, can spend bitcoin. Without block rewards, the bitcoin network would be a mess. Hasu explains that if they had enough computing power, miners could attack the network in two ways:

  • double spending of coins;
  • stopping the transaction.

But what strongly encourages them not to try either because they would then risk their block of reward.

In other words, miners will lose money if they don’t follow the rules. The more computing power miners direct towardBitcoin, the harder it is to attack the network because an attacker would need to have a significant portion of this processing power, known as a hashrate, to carry out such an attack. The more money they can make through block rewards, the more mining power goes to Bitcoin, and thus the network itself is more protected.

What happens when the reward block becomes small or disappears?

Given that miners need an incentive to participate fairly in the network, periodic reward reductions could become a problem. Transaction fees, which users pay every time they send a transaction, are a potentially alternative way for miners to make money. Theoretically, these fees are an option, although in practice transactions without them could wait a long time for processing, in case the network is congested. The size of the fee is set by the user or the wallet software he uses. Fees are expected to become a more important source of compensation for miners as the block of rewards decreases. In a few decades when the reward becomes too small – the transaction fee will become the main compensation to miners. On the other hand, there is also a good chance that transaction fees will not be a sufficient reward. This means that transactions may have to become more expensive over time for the network to be secure.

Traditional currencies and central banks

In most state currencies, the central bank, such as the U.S. Federal Reserve, has tools at its disposal that allow it to add or remove dollars from circulation. If the economy is down, the Fed can increase circulation and encourage lending by buying securities from banks. Alternatively, if the Fed wants to reduce the amount of dollars in circulation – it can sell securities from its account. Good or bad, bitcoin is a little different from traditional currencies. For one thing – the supply schedule is almost carved in stone. Unlike the monetary policy of government currencies, which takes place through political processes and human institutions – bitcoin’s monetary policy is written in code shared across the network. The change would require tremendous coordination and agreement in the Bitcoin user community. Unlike most national currencies familiar to us like the dollar or the euro, bitcoin is designed with a fixed supply and predictable inflation schedule. There will always be only 21 million bitcoins. This predetermined number makes them rare, and it is this shortage along with their usefulness that greatly affects their market value.

Another uniqueness of Bitcoin

Bitcoin is programmed in such a way that the reward for the block decreases over time. This is another aspect in which Bitcoin deviates from the norm of centralized financial systems in which central banks control the money supply. Unlike Bitcoin’s reward for a halved block, the dollar’s offering has roughly tripled since 2000. The Nakamoto group hinted that Bitcoin was created for political reasons because of a controversial statement that reads like a headline from “The Times” magazine. It is thought that bitcoin, if widely and long-term accepted – could potentially reduce the power of banks and governments over monetary policy. In Bitcoin’s system, it is impossible to create central monopolistic power.

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