What is Halving Bitcoin…No, not having bitcoin…halving Bitcoin. What does it mean? When does it happen? What happens to the value of bitcoin when it does happen? Well, stick around…Here on Bitcoin Whiteboard Tuesday, we’ll answer these questions and more.
What you will learn in this video
- What is Bitcoin Halving?
- What are the implications of Bitcoin Halving?
- Does Halving affect Bitcoin price?
Hi, everyone. I’m Nate Martin from 99 bitcoins dot com, and this is Bitcoin Whiteboard Tuesday. During each edition, we’ll go over some basic ideas about Bitcoin. That way, you can learn more about Bitcoin yourself, or forward these videos to friends or family members who have questions.
When Bitcoin was created in 2009 by Satoshi Nakamoto, he designed a way for new bitcoins to be distributed without a person or group of people deciding who should get them. The idea, called bitcoin mining, was to reward people with new bitcoin for doing the work of verifying new transactions into new blocks through computational work…Ok, I lost some of you there. For a better understanding of mining, check out our episode titled, “What is Bitcoin Mining?”
Suffice to say that new Bitcoin is created as a reward for miners verifying blocks in the blockchain. When bitcoin started, the reward was set to 50 coins per block. but Nakamoto put into the protocol a rule where every two hundred and ten thousand blocks, or roughly every four years, the reward would be cut in half, and so is named a ‘halving event’.
The first occurred in late twenty twelve, where block number two hundred ten thousand rewarded 50 coins to the winning miner, but then block number two hundred ten thousand one only rewarded its winning miner 25 coins. The second halving event occurred in mid 2016, halving the block reward again so the reward for block number 420,001 came in the amount of 12.5 coins. And so it will go, until sometime near the year 2140, when all 21 million bitcoins will have been mined.
So why the change? Why not keep the reward the same? Isn’t that unfair to the miners?
The answer to that question lies in the law of supply and demand. If the coins are created too quickly, and there’s no end to the number of bitcoins that can be created; eventually there will be so many bitcoins in circulation that they would have very little value.
Vitalik Buterin, who is, at the time of this episode, the lead developer of the Ethereum project, wrote an op-ed piece for Bitcoin Magazine and explains the need for slowing the distribution of bitcoins through halving this way:
“The main reason why this is done is to keep inflation under control. One of the major faults of traditional, “fiat”, currencies controlled by central banks is that the banks can print as much of the currency as they want, and if they print too much, the laws of supply and demand ensure that the value of the currency starts dropping quickly. Bitcoin, on the other hand, is intended to simulate a commodity, like gold. There is only a limited amount of gold in the world, and with every gram of gold that is mined, the gold that still remains becomes harder and harder to extract. As a result of this limited supply, gold has maintained its value as an international medium of exchange and store of value for over six thousand years, and the hope is that Bitcoin will do the same.”
In other words, much of the value of gold is found in the fact that more and more resources are necessary to find a commodity of which there is less and less to find. People who enter into the mining business already know this and take that fact into account when determining how much to invest in their mining equipment and other costs associated with mining, while still being able to make a profit from selling that commodity on the market. That’s true for gold, and it’s also true for bitcoin.
The difference is that gold miners don’t know how much gold is left, or when the supply will be gone. Because of the rules in the protocol, Bitcoin miners know exactly how much is left, and when the supply will tighten.
Ok…but I’m sure you’re asking…what will happen to the value of my bitcoin?
Well, the short answer is…nobody knows. In 2016, a week after the halving event, not much happened to the exchange rate of bitcoin against the US dollar. Where bitcoin was trading at around 650 US dollars at the time of the event, a week later the rate was about 675, so not much of a change.
Many believed that the anticipated rise in price actually occurred between three months and a year ahead of the event itself, where bitcoin was trading around $300 at a year prior and $430 three months before the halving occurred.
But that was a different time. Add into the mix the media attention and subsequent public awareness spike in 2017, the exponential growth of ICO’s and new coins in the marketplace, government regulations and restrictions, not to mention futures and derivative offerings opening up doors for institutional investment; and it becomes quite the task to predict what effect the next halving event will have on global exchange rates.
The important thing to remember is this: Bitcoin was designed to be valuable. First, in that there will only ever be a specific number of them in existence, 21 million; and that inflation in bitcoin’s economy is kept in check by slowing its distribution through the process of halving.
I hope this gives you a better idea of what bitcoin halving is, and why it’s an important feature of what gives bitcoin its value.
Now, you may still have some questions. If so, just leave them in the comment section below.
And if you’re watching this video on YouTube, and enjoy what you’ve seen, don’t forget to hit the like button, and make sure to subscribe for notifications to new episodes.
Thanks for joining me here at the Whiteboard. For 99bitcoins.com, I’m Nate Martin, and I’ll see you…in a bit.
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So by decreasing the reward for mining won’t that decrease the incentive to mine bitcoin? At some point, the investment to mine the coin will not be worth the incentive. to mine unless the price of bitcoin goes up and stabilizes.
Hi Kelly,
Yes, decreasing coin rewards will reduce the economic incentive to mine. Offsetting this tendency are transaction fees. If the value of Bitcoin continues to rise (as it has thus far, on average) then at some point the value of fees will be higher than the block reward. In fact, a few such blocks have already been mined, back during periods when fees were spiking.
A further factor in play here is difficulty. If fees prove insufficient to compensate for some future halving of coin rewards, then as you say, some miners will drop out. Not all miners however – the least profitable miners will quit first, as they’ll be the first to start losing money. As less hashpower will then be directed into mining, difficulty will drop. This will mean the remaining miners will have a greater share of the fees and block rewards, and expend less electricity in claiming them.
It’s a well-designed system, with a lot of checks and balances. That said, no one knows for sure how the incentives around halving will play out in the years ahead.