This topic will be covering the Bitcoin halving event, this post will try and simplify the process so that newer crypto investors can learn about a key event that happens within the cryptocurrency space.
If anyone is interested in previous past posts please see:
- Fundamental Research on projects: here
- What is a cryptocurrency wallet: here
- Staking: the concepts of PoS: here
- What is the blockchain: here
- Trading strategies: here
- Fundamental analysis: here
- Sentiment analysis: here
- Mobile device security education for crypto: here
- The smart money market cycle: here
- Lump sum vs Cost averaging: here
- Arbitrage Explained: here
- Dusting attacks explained: here
- Liquidity Pools Explained: here
- ETH London Hardfork Explained: here
- Defi hacks and exploits explained: here
- Smart contracts explained: here
BACKGROUND
The value of currencies, assets, goods and services are all based on the economic factor of supply and demand. In the case of fiat currencies, those in control of the money can increase the money supply at any time. However, Bitcoin doesn’t have an entity that controls its supply, so the question would be how does Bitcoin decide how much Bitcoin to produce? … this is done through the process known as the Bitcoin Halving.
THE BITCOIN HALVING IDEA
Satoshi Nakamoto pioneered an idea of removing the human element of the production of an asset and have in its placed a scheduled production that would last a significantly long time (the last BTC is predicted to be mined around the year 2140). This schedule would achieve three important factors: predictability, confidence and trust. Confidence and trust is integral to any currency so that the fact a production schedule is predictable can allow individuals to plan ahead of time for their needs.
For anything to have significant value, it needs to be scarce. Hence the reason gold is seen as so valuable due to its scarcity. Therefore, Bitcoin was given a limited supply of 21 million and through the use of the Bitcoin halving it would have a predictable realised rate.
HOW THE BITCOIN HALVING WORKS
Not to go into details about the Bitcoin mining process but it takes about 10 minutes to mine a Bitcoin block and difficulty is adjusted every two weeks (every 2016 blocks) to keep this time schedule as stable as possible. The miner who does verify the block is rewarded in Bitcoin, when the protocol first started in action it would reward the miner with 50 BTC (worth today $2.25 million with a price of BTC at $45,000.
However, after every 210,000 blocks mined or an estimated time period of 4 years the rewards are cut in half. So the 2012 halving the reward was cut to 25 BTC, the 2016 halving to 12.5 BTC and the 2020 halving to 6.25 BTC. Now one could ask what’s the incentive for miners when the rewards are cut in half? Well simply, look at the price charts, the value of Bitcoin has continued to increase exponentially some time after a halving event due to the supply shock so the incentive is still there for miners despite receiving less rewards. This predicable and time scheduled asset has meant price predictions could be made as long as the demand outweighs the supply. The story of Bitcoin is an innovative and powerful reminder of how scarcity can prevent overwhelming inflation.
As always any topics you want covered just let me know. The following are topics I have on my list:
- inflation vs deflation
- Cryptographic Hashing for the blockchain
- Cryptographic Hashing: a python example
- Longs vs shorts explained for beginners
- ETH gas explained
- Lending and borrowing in defi
- Yield farming explained
- Why time in the market beats timing the market
- The technicals behind NFTs
- APR vs APY
- UDP and TCP
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