To make a layman understand the basics of Bitcoin, I’d like to quote a statement by Peter Diamandis (the renowned physician, engineer, and entrepreneur),
“Bitcoin is smart currency, designed by forward-thinking engineers. It eliminates the need for banks, gets rid of credit card fees, currency exchange fees, money transfer fees, and reduces the need for lawyers in transitions of all good things”
The idea behind the concept of Bitcoin was to enable payments to be shared between users without passing through a central authority, like a bank or a payment gateway. It is created, shared and held electronically. These are not printed like a dollar or euro bills but instead produced by computers worldwide using a particular free software.
Bitcoin Halving: A Vital Understanding
A much-awaited event is about to change the worldwide Bitcoin network, and it happens every four years. The number of new Bitcoins created and transacted among miners with newer blocks of earnings will split into half!
This is a portion of Bitcoin’s conventional and transparent monetary policy which can be verified in its source code that can be fetched from Bitcoin’s core GitHub repository.
When events of this kind take place, it impacts Bitcoin’s inflation rate and is referred to as a “Bitcoin Halving” event. Between the two previous halving events, around 4,20,000 blocks were mined.
Why Do Miners Opt for New Bitcoins?
Before getting insight into the effects of Bitcoin halving, it’s crucial to comprehend the basics of Bitcoin mining. Whenever someone creates a new Bitcoin, it’s sent to all the other nodes active on the network, together with those who have contributed to the mining procedure.
These transactions are collected and stored locally while the miners are operating on the puzzle. This demands a huge amount of computing abilities.
If a miner successfully solves the puzzle before anyone else, they earn the capacity to publish a new block of a transaction into the public blockchain and cash a reward of 12.5 Bitcoins (that would soon amount to 6.25 Bitcoins in 2020) along with the transaction fee.
The fountainhead behind the idea of mining was Satoshi Nakamoto. Nakamoto’s idea was to allow miners to crucially prove that they have incurred a risk in order to solve a puzzle along with every new block of a transaction, for which they must be rewarded.
The caliber to decipher the puzzle implies to the rest of the network that the miner has spent money on some resources (hardware, electricity etc.) and has earned the reward in the form of mining a block. The miner is keen to spend money on the said resources, in exchange for a possibility of winning the block reward.
Essentially, miners have good chances of earning a profit by ensuring that the cost of resources that are invested in computing the answer to the puzzle is minimal, and most importantly, lesser than the Bitcoin-denominated rewards that they receive through the mining system.
What Does Halving Mean to Bitcoin Miners?
It’s a fact that a few miners will incur losses with the block reward fragmenting into half (from 12.5 to 6.25 Bitcoins) in 2020.
So what usually happens when a miner is functioning at a loss for an extended period? In most instances, they turn off their hardware and other equipment.
Experts like Brian Armstrong, CEO of Coinbase, have conjectured that if the halving event could lead to a recession scenario, where a sudden drop in the network hash rate (the amount of computing power on the Bitcoin network) indicates slower transaction confirmations, then it would further lead to a lower Bitcoin price, followed by more number of miners turning off their pieces of equipment.
A more extensive portion of the Bitcoin mining community does not look worried about the halving event. The Bitcoin Magazine recently conducted interviews with several representatives of the mining community which included Jihan Wu of Bitmain and Valery Vaviloy from Bitfury, who were all hopeful about the halving event.
That being said, still, most of them believe that there will be a slight drop in the entire network hash rate.
It’s intriguing to mark that miners are most likely to receive a more significant USD-denominated block reward after the halving event. Though the number of Bitcoins consisting of a block reward is about to be split into half, Bitcoin value has more than doubled in the past few years.
What Does Halving Imply for the Bitcoin Price?
A number of Bitcoin enthusiasts are optimistic that halving will bring an immensely positive impact on Bitcoin’s price as it is historically evident that Bitcoin’s price has risen quite considerably within weeks following a drop in the block reward. Whether this increase will carry on post-future halving events, is still a debatable topic.
Either way, it will be enthralling to witness how the halving event affects both the price and the mining network.
Hope this article gave you a clear idea about bitcoin halving.Let us know in the comments.