During Bitcoin’s creation it was decided that every 210,000 blocks (or around every 4 years) the block reward would be halved until the reward reaches one satoshi, which is the smallest Bitcoin unit. The block reward is given to a miner who successfully mines a block on Bitcoin’s blockchain. In addition to the reward, the miner also receives the fees associated with each transaction. Although the Bitcoin reward started at 50 Bitcoin, eventually the reward will be zero, and miners will receive compensation solely from the fees. Until then, miners will receive fees in addition to the block reward.
The purpose to the halving of the block reward is to ensure that the hard cap of 21 million Bitcoin is reached at a predictable pace which allows for sustained value, or reduction of inflation. If the block reward was to remain at 50 for example, then the total supply of 21 million Bitcoin would reach the market too quickly, outweighing the demand and ruining its value. Bitcoin halving can be looked at like gold in this respect, as gold is mined from the ground, and mining it makes it exponentially more difficult to find and mine more, thus making what has already been mined more valuable or at a minimum stabilizing its value. By halving the reward every 210,000 blocks it ensures Bitcoin has a chance at stable value through controlled release of its supply, this keeps inflation under a controlled mathematical and cryptographic formula.
Has It Happened Before?
Yes! This will be the third time that the block reward will be halved. The first halving occurred on November 18, 2012, dropping the reward from the aforementioned 50 Bitcoin down to 25. It then halved again on July 9, 2016 to 12.5 Bitcoin. In May, we will see the block reward go down to 6.25 Bitcoin per block.
Why It’s Important
With each halving, miners receive less Bitcoin for their efforts. Mining is done through computers doing trillions of calculations a second and as the block reward is halved it means that the miners receive less money for the work, unless the price of Bitcoin rises to make mining more profitable. This decrease in profitability in theory could be passed onto the users in the form of higher fees to process their transaction so that it is worthwhile for the miner. With each halving the miner’s reward will be decreased and the fees they charge will subsequently be increased, possibly to the point where it may not be worthwhile for many to continue to invest in the mining of new Bitcoin, either as a business or an individual.
Therefore many are excited by the halving, as it should cause the new supply of Bitcoin coming into market to be less and less over time and therefore stabilize, if not increase, the value of the supply already in the circulation. This is Bitcoin’s method for inflation control and is a huge part of Bitcoin’s appeal. The upcoming May halving in particular is noted to be important by some economists, as it will cause Bitcoin to inflate at a rate that is lower than that which the Federal Reserve currently experiences.
Differing Investment Opinions
The most difficult thing to figure out with the halving is the effect it will have on Bitcoin prices. There are many bullish investors who see the halving as a boon to Bitcoin’s value for many of the reasons already mentioned in this article, so it seems like a good time to mention some contrasting views. Those who are bearish about Bitcoin in relation to the halving mention two key points:
The first is that the halving is not new information. Since Bitcoin’s inception it has been known that every 210,000 blocks the subsidy would be halved, so it is quite possible that it is already factored into Bitcoin’s current price.
The other is that there was only a discernible increase in Bitcoin’s price during the first halving, the second had little effect on the market, and the upcoming one isn’t necessarily any different. This is due to the increased ability for miners to be profitable; the increased acceptance of Bitcoin as a form of currency, public awareness, along with hedging options that did not exist when the first halving occurred.
However, pundits of Bitcoin point out that while to the crypto community the guaranteed scarcity of Bitcoin is well-known, the general public is unaware of this provable characteristic. As they become aware there will be new entrants into the market, and this will drive up Bitcoin’s value.
Disclaimer: Cryptovantage is in no way advising readers to buy, sell, or short Bitcoin.