Cryptocurrencies and blockchain technology took over the digital world as soon as they were launched. Satoshi Nakamoto realized that the world is moving towards fast and electronic cash, so in 2009 he came up with a new digital currency called Bitcoin – Digital Cash that can be transferred from one person to another without being a central entity involved. A revolutionary development in the field of cryptocurrencies.
One of the main concepts behind the development of bitcoin was to make a transaction system that doesn’t include any central bank or entity.
This decentralized system will depend on the involvement of individuals, where all the transactions take place on a platform called blockchain.
Bitcoin – the virtual gold of the internet is not just called gold for its value, in-fact it shares quite a few similarities to gold in terms of its value and nature of how its price changes over time.
By definition, we can say that it’s a programmatic reduction in the number of Bitcoins that are being mined and brought into circulation.
Too difficult to understand?
Let me make it easy for you with an example, let’s suppose we have a bowl with a faucet running water into the bowl.
The bowl represents the number of Bitcoins already mined and brought into circulation, which are about seventeen and a half million currently.
The water running from the faucet is equivalent to the bitcoin currently being added to the bowl.
Now, over time, the water from the faucet, generating the Bitcoins, is slowly being turned off.
This process decreases the reward value of blocks in the chain, and this process is known as bitcoin halving.
Do not worry; we will discuss the reward value of blocks and how that works later in this article.
In almost a century, the nozzle will be completely turned off, resulting in no new Bitcoins available for mining.
The bowl we used in our example is left with the maximum supply of Bitcoins that is about 21 million.
Bitcoin was designed in a way to differentiate it from fiat currencies, which has inflation built into it, Bitcoins on the other side is developed to behave like gold, i.e., it can’t be faked or counterfeited, or even its supply couldn’t be artificially increased.
We all know the mining of gold these days is not as easy as it used to be in the past. The process now requires a lot of machinery and mining power.
Similarly, Bitcoin also involves a lot of computation power in its mining process.
To properly understand Bitcoin halving, we must understand the mining process first.
Bitcoin blockchain was programmed to operate on a ten-minute interval, meaning every 10 minutes a new block gets mined and one of the miners is made responsible for that block, he or she stuffs all the transactions made at that point, packages’ it up and adds that block to the chain.
The miner who discovers the block has to bear the cost of this process, and in return, are rewarded with the “block-reward.”
In 2009 the block reward was much higher than it is now.
The primary motivation behind this process was to ensure the massive growth of bitcoin at the start. A rewarding system with high rewards and less competition was kind enough to attract an enormous number of participants helping each other in the overall bitcoin mining process.
As discussed earlier, the bitcoin blockchain works on 10 minute’s interval, i.e., one block is added at around 10 minutes interval.
Satoshi set the value of bitcoin to be halved after every 210,000 blocks. If we multiply the number of blocks with 10 minutes, we come up with a 4-year time gap, i.e., the duration after which the bitcoin halving event occurs, reducing the reward value by 50%.
Bitcoin reward halving is reducing the reward value of each block in the chain. When a user is made responsible or handed over a block after performing all the required operations, he is rewarded with Bitcoins.
In 2009 the reward value started from 50 Bitcoins per block. Then it dropped 25 Bitcoins, and then to 12.5 Bitcoins. In mid-2020, it’ll drop to 6.25 Bitcoins. As of July 2019, two halving events have already occurred, with next supposed to take place in 2020.
The value at that time will be reduced to six and a half quarter after slashing of another 50%.
You must be wondering what happens when the block reward is reduced to zero at some point.
How will the miners make money?
Well, one thing encouraging enough to keep bitcoin alive and running is the transaction fee.
“If the potential rewards from mining are lower because of the halving, that may discourage many people from mining Bitcoin,” according to Goodman.
Miners are awarded a fee for their efforts. With an increase in the value of bitcoin, the transaction fee also increases.
Eventually, a transaction fee will be so high that it will be enough for miners to keep on the process even though they won’t be awarded any block rewards as the halving events will reduce the block reward to zero one day.
This idea might not impress everyone to keep intact with the system, but still, it can make sure bitcoin could live its life for a more extended period.
Bitcoins software is genius; its overall process is designed mimicking the concept of how gold works, and think of all the gold rushes occurring a few decades back.
Just a guy with a shovel had a chance to dig out and make some bucks out of it, but now as the industry is heavily commercialized and time and energy to discover new gold has increased over time, and at the same time, the amount of gold is decreasing.
This is the core concept making the gold more valuable and precious.
Halving is added for the same reason, as overtime, bitcoin will become scarce, and its value will be increased just like gold.
Crypto Industry believes that the bitcoin halving process is the primary catalyst that kicks bitcoin to take off in every new cycle.
The wallet growth of bitcoin depicts that the combination of limited supply and higher value rewards, it only makes sense that price will eventually go up; the simple yet effective concept of supply and demand being used here.
A user named Loutrader created a on a trading view, representing the historical price of bitcoin from late 2011 to February 2019. Plotted on a logarithmic scale, the graph shows impressive statistics.
Remember, past events do not always predict future events. So, when doing your research, be sure to keep this in mind as you decide how to invest in Bitcoin.
An interesting observation we can make from the graph is the graph skyrocketed after the halving event, thus proving the point of the halving process. This trend is quite contours until now.
The best time to buy bitcoin according to this graph is one year before halving and the best-selling time is one year after the halving process.
As discussed earlier Bitcoins are finite in number, i.e., 21 million.
Once the miners are done mining all of this, in theory, there will be no bitcoins left to be mined. The process will revolve around already present Bitcoins.
21 Million does seem like a huge number, but one issue that resulted in the number being lowered is from lost bitcoins.
It is thus resulting in an actual number of existing bitcoins far less than 21 million. The lost Bitcoins have no track, and it is not possible to bring them back to the system.
Reasons for lost Bitcoins have usually forgotten passwords, lost wallets or issues like hardware failure. According to the last study surfaced online on March 31st, 2015, the total missing bitcoins are evaluated at around $1.23 billion, but then again it’s an estimation and initially lost bitcoins might be a lot higher than this value.
Bitcoin was designed in a genius way, a digital currency that remains alive, whose supply and demand concept results in its value increasing radically over time is the real work of a genius.
Bitcoin dramatically changed the concept of fast and digital cash.
The value of 21 Million is a fixed number that is allotted to the users and is being distributed through the process of mining, and the halving process keeps the process going by decreasing the block reward that ultimately results in increasing its value over time.
Once all the new bitcoins are not being entered into the system, one thing that keeps the miners intact is transaction fee that is directly related to the value of bitcoin and halving is one of the genius methods to prevent or raise the value of bitcoin over time.
Over time bitcoin is spreading and a lot of international websites and online channels are now accepting it as a payment method.
So the future is quite bright for investors and crypto miners.
The gold of the internet, known as Bitcoin, will live on for years to come.