In simple words ‘Halving’ means half of something. The term when used in the context of Bitcoin, refers to cutting in half its mining rewards. Next year on May 20, Bitcoin Halving will take place that will change the value of Bitcoin. The halving of bitcoin has already taken place twice earlier. First time in November 2012 and the second in July 2016. These halving ended up making some investors and traders of Bitcoin very rich. Although it has happened before, with development, media attention on Bitcoin and increased awareness, this halving is becoming a more sensational topic among traders, investors or even normal people.
In the halving process, block subsidy of bitcoin gets cut in half which halves the number of Bitcoins mined each day. In this article, we will understand what is halving of Bitcoin and why is it important. But before we start with that, let us understand how Bitcoin enters circulation.
How are Bitcoins Produced?
Miners of Bitcoin or any other cryptocurrency, attempt to solve some computational problems. The problems are solved by using powerful computers and this process is known as Mining. These problems are important to be solved to add Bitcoins to the network or circulation. When miners solve the problems or rather say mine Bitcoin, blocks full of transactions are added to the blockchain of bitcoin.
On solving these blocks, miners are rewarded with a fresh bitcoin. This reward serves as an encouragement and incentive for spending a huge amount of energy on mining and securing the blockchain network. Presently, out of the maximum of 21 million bitcoins, over 17 million have been mined. And once the maximum supply of 21 million bitcoins will get mined, no new bitcoins will be created.
What is Bitcoin Halving?
Real currencies are printed by the will of Central Banks. But this case is not the same with Bitcoin. The circulation of Bitcoin is limited to 21 million maximum. The introduction of new Bitcoins causes inflation as there are new units available for investing or trading. In the beginning, when a miner would mine a block, 50 bitcoins were rewarded. On an average, a block is solved by miners and is added to Bitcoin’s blockchain, at every 10 minutes. So, this means that every 10 minutes, 50 BTC was received in a single miner’s wallet.
Are you now thinking that miners who are using huge mining machines would be earning vast amounts of money? The answer is yes, but they are not earning even near to 50 BTC. Receiving 50 Bitcoins for mining a block was at the start of introducing Bitcoin when you could mine using a laptop only. At this time, only 12.5 BTC is received as a block reward. Wondering what has happened? Block reward was made half by the process of Halving.
As we mentioned earlier, Bitcoin halving has taken place twice. At first, it was made 25 BTC from 50 BTC and in the second time, 12.5 BTC from 25 BTC. Halving is done once in every 4 years or at every 210,000 blocks. Once BTC crosses this number, the block reward is cut in half. This process is pre-decided and will continue to occur until the last Bitcoin is mined and that is expected in the year 2140.
Why is Halving of Bitcoin Important?
From the above, we have understood what is halving of bitcoin and how it takes place. Now it’s time to understand why is this process important.
Creates Predictable Scarcity
Bitcoin’s circulation is finite and is fixed at 21 million. There will never be 21,000,000.000001 BTC without a change in rules by consensus. The feature of BTC being hard-capped at 21 million is being maintained by halving block subsidy. Hence, halving is important and is foreseeing the actual predictable scarcity of Bitcoin.
Potential Price Repercussions
Before both the previous two halving, Bitcoin’s price was seeing a rapid rise. There are many theories concerning how BTC’s price can be changed or formed but almost all the theories depend on Bitcoin’s total supply. So, as both the halvings lowered the supply of new Bitcoin by half, suffice to say the process of halving affects the price of BTC a lot.
In the end, we can say that in 2020, the halving of BTC will be the most important thing in the whole crypto world and especially for Bitcoin. When the first halving took place, no one had a single idea about what will happen and in the second time, Ethereum was introduced which also gave rise Initial Coin Offering. Now, we know what is Halving and how it takes place, let us wait for the next year and see how it affects the price of BTC along with what new changes will take place.
