If you are a miner and investor in Bitcoin then you must be familiar with the term bitcoin halving, how does it work and why does bitcoin reward to the miners get halved after a certain interval. But if you are new to it, then here is the guide which explains everything in detail about the bitcoin halving concept.
The whitepaper is a report to the world which informs about an issue or a new which is intended to make a user understand the particular concept, solve a problem or make a decision.
In the case of Bitcoin, Satoshi Nakamoto – founder of Bitcoin (we do not know that he is a single person or a group of people i.e. he is anonymous), published a whitepaper on 31st Oct 2008 of the release of Bitcoin in the market. The whitepaper was named as “Bitcoin: a peer-to-peer electronic cash system” and was published just two months before the first Bitcoin was mined.
This paper included every detailed information about the Bitcoin and its working. It has all the information about the decentralized currencies and the use of blockchain and the working of miners.
So, this paper also contains the concept of Bitcoin halving and which says that all the Bitcoins that would be created will be finite. What do we mean by this, will be explained here in this article.
What is Bitcoin Halving?
We know that having a means to get half or divide by 2. So in terms of Bitcoin, the number of coins that are received by the miners when they mine a coin gets halved when a particular limit is reached. This is called a calving event.
When Does Halving Occur?
Suffice to say that a new Bitcoin is created as a reward for miners verifying blocks on the blockchain. When Bitcoin was started the reward was 50 bitcoin per block. But according to Satoshi Nakamoto, he put in the protocol that for every 210,000 blocks, or roughly every 4 years, the reward would be cut in half. And so is named as a calving event.
The first halving event occurred in the year 2012, where block number 210000 rewarded 50 coins to the winning miner, but block number 210,001 only rewarded 25 coins to the winning miner. The second halving event occurred in the mid-2016, having the reward block again. So the reward for the block number 420,001 came in the amount of just 12.5 coins to the winning miner.
The next halving event will occur in the year 2040, where all 21 million bitcoins will have been mined. So there arises the question, why this changes and why not keep the reward the same for all the miners.
The answer to this question lies in the law of supply and demand. If the coins are created too quickly and there is no end to the number of bitcoins being created, eventually there would be so many bitcoins in the circulations that they would have very little value and it will depreciate.
Vitalik Buterin, who is at the time of this episode – the lead developer of the ethereal project, wrote an op-ed for the Bitcoin magazine. He explains the need for slowing the distribution of bitcoins through halving this way.
The main reason as to why this is being done is to keep the inflation under control. One of the major faults of the traditional “fiat” currencies, controlled by central banks, is that the banks can print the currency as much as they want. IF the banks print too much currency then the law of supply and demand ensures that the value of the currency starts to drop too quickly.
Bitcoin, on the other hand, is intended to simulate a commodity like gold. There is only a limited supply of gold in the world and every gram of gold that is mined, the gold that still remains is 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 6000 years with the hope that Bitcoin will do the same.
What About Future Halvings?
The next and last bitcoin halving will occur in the year 2020. Because of the lowering of inflation, this means there is going to be a minimal effect of future halving on the supply. The upcoming bull rally may be the last one because of the effect of halving. Also when there is a higher market cap of Bitcoin then it will be harder to move even more percentage wise. This means that the bear market should end soon before 2020.