So what is the halving? Bitcoin halving is an event that not only helps control the value and distribution of bitcoin but also determines the amount of block rewards each miner can expect to see after a node verifies a block of transactions.
If that didn’t make much sense, don’t worry- we’ll break down each concept individually throughout this article. Helping you understand bitcoin is one way to help users become more comfortable with adoption and trading. Helping to make the bitcoin craze a whole lot more understandable.
Another way to improve your bitcoin savvy is to use a bitcoin exchange platform that makes it simple for novice and advanced traders alike to do business. Platforms like Bitvavo not only offer expertise and help to new users but also offer a wide variety of cryptocurrencies for advanced traders to dabble in. But that’s another article.
Firstly, you’ll need to understand why bitcoin is considered a commodity. Meaning that, like gold, bitcoin is often considered a store of value. The reason bitcoin functions in this manner is largely because of the halving- which bases its principles on the concept supply and demand.
Supply and demand can affect the value of just about anything. Should there be more demand than there is supply- you get a price surge. If there is more supply than demand, the market is considered saturated and prices drop.
In order to help contain market saturation and demand-based inflation, bitcoin’s creator, Satoshi Nakamoto designed bitcoin to function by using artificial scarcity. Which means that only a specific number of bitcoins exist and will ever exist; and of those coins, they are only released at a predictable and predetermined rate.
There will only ever be 21 million bitcoins in existence. No more, no less. Currently, there are about 18.2 million bitcoins in circulation. More bitcoins are released roughly every 10 minutes. These coins are awarded to miners for maintaining the network’s public ledger. How many coins the miners are awarded all depends on bitcoin halving.
Block Rewards and Mining
Anytime a transaction occurs on the bitcoin network, that transaction needs to be verified and added to bitcoins public ledger- the blockchain. The ledger gets its name because it’s essentially a chain of blocks, where each “block” is a group of many transactions that have been verified.
In order for transactions to be verified and blocks to be created- network computers, called “nodes, must “mine” these transactions. Mining is a process by which large supercomputers with specialized hardware work to solve extremely complex mathematical algorithms. The algorithms are part of the cryptography that keeps bitcoin working and decentralized.
Every node on the bitcoin network attempts to solve each transactional cryptography as it comes in. Ensuring that all transactions are properly logged onto the blockchain, so they can’t ever be replicated or changed. When any particular node solves these algorithms they create a “block” and add it to the chain. A block is added to the chain about every 10 minutes. Then, that node is rewarded a predetermined amount of bitcoin- this is known as a block reward.
As the block reward value is halved, the algorithms that are required for the transactional verification also get much more difficult. Which is how bitcoin maintains its tight release schedule.
The block reward changes every time 210,000 blocks are created. For example, the node that created the first block ever (the “genesis block”), was awarded 50 bitcoins (BTC). After that, each block up until 210,000 was rewarded 50 BTC. At block number 210,001, the nodes were then awarded 25 BTC.
The block award amount continues to decrease by half each time another 210,000 blocks are generated. This occurs roughly every four years. The schedule of the bitcoin halving is designed to keep that tight control over the market value of the bitcoin. Never releasing too many or too few, making it a value that is globally accessible.
At the current block generation rate, all 21 million bitcoins are scheduled to be mined by the year 2140. With the block reward scheme looking something like this:
- 2009 – 50 BTC
- 2012 – 25 BTC
- 2016 – 12.5 BTC
- 2020 – 6.25 BTC
- 2024 – 3.125 BTC
- 2140 – 0 BTC
While there is a valid argument that bitcoin halving is very necessary for the form and function of the network, concerns also rise over mining processes and block rewards.
One of the biggest concerns regarding mining is that it’s an expensive and energy-hungry process. In 2009, when bitcoin was created, almost anyone could mine for bitcoin. All you needed was a standard computer with a decent processor. But now, as the cryptography has gotten so incredibly complex- the only machines that can actually do the job with any efficiency are not only massive but also wildly expensive. Both to own and to operate.
These machines are expensive to own because particular processors, called application-specific integrated circuits or ASICs for short, are needed to mine bitcoin efficiently. These purpose-built processors come with a hefty price tag and consume a huge amount of energy to run, meaning that the cost of mining will go up as block rewards go down.
While this doesn’t mean that mining will stop altogether, there is concern that only massive corporations will be able to afford to do the mining- which would make bitcoin’s network very centralized. A concern for just about any user.