|— In May this year, the highly-anticipated Bitcoin halving event will take place|
— This four-yearly event decreases the mining reward by 50% as intended by the Bitcoin network’s protocol
— The halving event causes Bitcoin to become more scarce over time, giving it a disinflationary premise
— While no guarantee for the future, historically Bitcoin halving events are met with increases in its market value.
A major Bitcoin event is upon us soon, namely the Bitcoin halving event. Taking place in May this year, it’s a much-discussed topic as many see the disinflation it brings as a bullish sign for the leading cryptocurrency.
What is the Bitcoin halving?
The Bitcoin halving is the event where Bitcoin’s mining block reward, also known as the coinbase transaction, is cut in half every 210,000 blocks, or roughly every 4 years. The reward is issued on a per-block basis, and is the rate at which Bitcoins are created into the network’s capped 21 million supply roughly every 10 minutes.
The mining reward is the determining factor in the rate of emission of Bitcoin (BTC) that flows into the network, with the influx of BTC compared to mining hash power regulated by the Bitcoin difficulty adjustment algorithm.
The next Bitcoin halving is expected to occur in May 2020 and will reduce the current block reward of 12.5 BTC to 6.25 BTC.
Miners dedicate specialized mining hardware and software in a lottery-like race to find a specific value (the nonce) below a certain threshold, giving their equipment’s hash power to the Bitcoin network. This process is known as proof-of-work (PoW) The winning miner broadcasts the next pending block to the network, which is subsequently validated by both the network of full nodes and mining nodes.
Once the block is approved and appended to the blockchain, the miner is awarded with the block reward, which currently yields 12.5 BTC. The looming halving event which sees this reward reduced to 6.25 BTC will be the 3rd in the largest cryptocurrency’s history, with the first event reducing the block reward from 50 to 25 BTC in 2012, and the second from 25 to 12.5 BTC in 2016.
Bitcoin’s halving event is always a highly-anticipated moment in the network. Primarily because of the unique nature of the public network’s supply and emission schedule, Bitcoin halving events draw all kinds of speculation on how it will impact the market price and long-term economic incentives on miners.
Both the market and mining impact are essential to understand.
The importance of Bitcoin’s halving event
Bitcoin was designed with a controlled supply that has several unique characteristics distinguishing it from other money systems like fiat currencies.
- Its supply is capped at 21 million BTC
- It has a disinflationary emission schedule (i.e., the bitcoin halving)
Currently, more than 85 percent of all Bitcoins that will ever exist have been mined. With the supply cap at 21 million, that encompasses more than 18 million BTC. Currently, approximately 1,800 BTC are generated every day from 144 mined blocks at an annual inflation rate of 3.7 percent.
In particular, the halving event is the critical moment where bitcoin’s disinflationary emission schedule comes into play.
Mining rewards that are issued every 10 minutes are reduced by 50% every 4 years, ensuring that less and less new Bitcoins are created until 2140 – when the very last BTC will be produced. This element assured by Bitcoin’s protocol will cause it to become more scarce over time. This is contrary to fiat currencies, where more money can be printed whenever a government or central bank issues it, potentially leading to inflation. As can be seen with gold, scarcity can give an asset a much greater value. This principle is widely known as the stock-to-flow ratio.
In simple words, Bitcoin is designed in a way where it’d be more likely to increase in value rather than decrease like fiat currencies.
The next halving event will reduce Bitcoin’s inflation rate to 1.8 percent, being significantly lower than the average worldwide inflation rate. This has some intriguing consequences on Bitcoin’s long-term economic impact.
Since the awarded BTC for miners decreases every 4 years, miners need the price per Bitcoin to increase to keep their business alive.
Interestingly, miners account for a specific portion of selling pressure on bitcoin’s market price because they sell their accumulated BTC to buy hardware equipment, like ASICs, and pay for overhead costs such as electricity. As the block reward is reduced every 4 years during the halving event, the selling pressure by miners should decrease on Bitcoin markets. This potentially further enables Bitcoin’s price to swing upwards.
However, models projecting Bitcoin’s potential market impact from the halving event often rely on what it has done in the past. While no guarantee for the future, Bitcoin price has historically responded positively to halving events.
Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video 3 Ways to Earn Passive Income from Crypto.