What is Halving?

What is Halving?

What happens to the value of Bitcoin and other cryptocurrency that pass through halving? Here’s the answer:

On average, every four years (or 210,000 blocks) the “reward” given to Bitcoin diggers for adding a block to the blockchain is halved. Halving was developed by Bitcoin creator Satoshi Nakamoto to keep bitcoin inflation under control. Halving shrinks the supply of new bitcoins by half, and many believe the event has a key effect on its price (which seems perfectly logical).

What does it mean ?

To understand what halving is, you first need to understand the basics of “digging” a bitcoin. In a nutshell, new bitcoins come to the fore as a reward for their “diggers” every time they “dig” a new block. When Satoshi Nakamoto creates the rules for bitcoin protocol, he defines two basic characteristics. Firstly, Bitcoin mining is limited to 21 million. Second is the number of bitcoins generated per block, ie. the prize is reduced by 50% for every 210,000 blocks.

How long does it take to get to the next bitcoin halving? Since 6 blocks are dug in an average of one hour and halving is done once every 210,000 blocks, then on average every 4 years there will be new halving. In essence, this means that the mining fee will be reduced by 50%. For example, if today a digger receives 12.5 bitcoins to create a block, then the next halving will receive 6.25 bitcoins. Of course, the fact that 21 million bitcoins will be generated does not mean that there will actually be 21 million bitcoins in circulation. In fact, there are many lost bitcoins that will never be recovered (it is assumed that 1/3 of the bitcoins acquired to date have been lost).

Why should there be halving at all?

Why doesn’t your prize remain the same? Isn’t this unfair to the diggers?

The answer to this question lies in the law of supply and demand. If coins are created too quickly or there is no limit to the number of bitcoins that can be dug, there will eventually be so many bitcoins in circulation that they will have very little value. Vitalik Buterin, lead developer of the Ethereum project , told Bitcoin Magazine the need to delay bitcoin extraction through halving in this way: “The main reason why this is done is to keep inflation under control.”

One of the major mistakes of traditional fiat currencies, controlled by central banks, is that banks can print as many currencies as they want, and if they print too much, the value of the currency begins to decline rapidly. Bitcoin, on the other hand, is designed to resemble a commodity such as gold. There is only a limited amount of gold in the world and the more it is mined, the harder it is to mine the rest. As a result of this limited supply, gold has maintained its value as an international medium of exchange and has retained it for over six thousand years. The hope is that Bitcoin will do the same. 

When will the next halving occur?

Since we know the average time to generate a block (10 minutes), we can estimate that the next halving should occur sometime around May 2020. Some members of the Bitcoin community note, however, that a new block is created every 9 minutes and 20 seconds, not every 10 minutes as expected. This is 7% faster than the estimated 10 minutes. 

How will it affect the price?

Of course, the main question people ask themselves is “Will this affect the price of bitcoin ?” The answer is “no one knows”. In 2016, a week after halving, nothing significant happened with the bitcoin exchange rate against the US dollar. While bitcoin is trading for about $ 650 during halving, a week later the exchange rate is around 675, which is not a big change. In addition, the first bitcoin halving occurred on November 28, 2012, when the 210,000 block was decided. At that time, the price of bitcoin was $ 13.42, and halving did not seem to affect the price so much. However, shortly after, the price of bitcoin jumps to $ 230, but many attribute it to the provision of a Cyprus rescue package.

However, there are arguments in favor of both scenarios. Some claim that halving is well known to all crypto enthusiasts and therefore it will not surprise anyone or cause a big change in the price of bitcoin. Others say that because of a shortage of bitcoin supply, the price will rise as demand increases. However, no one believes that halving can lower the price of bitcoin in any way.