What is halving?
Nowadays Bitcoin is definitely something, which you should be interested in. Why? Because it is truly dynamic. Bitcoin's decentralized, anonymous and ever-changing nature has caused many ups and downs in its price, as well as continuous growth in people's interest. Ever since the release of Bitcoin, everyone has been in awe because it revolutionized people's perception of money—it was so different from anything we have seen before. The idea behind Bitcoin was the creation of a new type of medium of exchange, which will not obey any government and bank rules. The finite supply of tokens, as programmed in Bitcoin's code itself, serves as a guarantee that it won't face the attack of inflation, preventing Bitcoin from losing its value. But how and why it works like that?
The process behind the deflationary nature of the original cryptocurrency is called halving or halvening and that is what we will dissect below.
Mining and halving
To understand what halving is, let's first look how exactly miners earn Bitcoins.
Miners earn Bitcoins from two sources—transaction fees and block rewards. Firstly, each time someone sends Bitcoin to someone else, one usually pays a small fee in BTC. The miner that validates the transaction and puts it in a block earns this fee. Secondly—the same miner earns the so-called block reward for every new block (that comprises one or more transactions) they add to the blockchain. This reward consists of newly mined coins that previously did not exist. It is called mining, as the logic behind Bitcoin's blockchain is quite similar to the way the gold industry works. In order to introduce new gold, it needs to be mined, but the more gold is mined, the harder it gets to find new and significant gold deposits.
To simulate the harder process of mining new gold and the fact that the found deposits are getting smaller and smaller, it is hard-coded into the original blockchain that the mining of Bitcoin will need more and more computational power with time to validate transactions, while the reward for finding new blocks will get lower. This is where the halving comes into play.
Halving is the reduction by half of the amount of Bitcoins earned by each miner and it happens every 210,000th block, which makes it quite a predictable phenomenon. Approximately, every 10 minutes a new block is found, 6 in an hour and 210k every 4 years—when halvings occur.
The "Digital Gold" and the new money
We hope that it is getting clearer why Bitcoin is often referred to as the "Digital Gold". The limited supply of gold has made it a great investment—the scarcer something is, the higher its value gets. As time passes, fewer and fewer new Bitcoins will be found and every 4 years the amount will be reduced until the block reward gets so small that it essentially becomes zero. It is calculated that in approximately 2140 the last Bitcoin will be mined and it will be Bitcoin number 21,000,000. The finite supply thus keeps Bitcoin's worth under control and the risk of inflation limited. Unlike regular currencies like the dollar or the euro, new Bitcoins cannot be printed out of thin air to reduce its price. While if not spent, our savings in fiat currencies lose their value over time and is better to spend or invest them now, Bitcoin's worth goes up with time, making it a deflationary currency.
Halving events so far
So far, there have been two halving events. The first miners used to earn 50 BTC for every found block, but in 2012, the 210,000th block was mined and the block reward dropped to 25 Bitcoins. In 2016, the second halving happened at block 420,000 and since then the miners have been receiving 12.5 Bitcoins for putting a new one on the blockchain.
At the time of writing, 615056 blocks have been mined, so the next halving is already knocking on our door and expected in May this year. From then onwards miners will be rewarded with 6.25 Bitcoins until the next halving in 2024 occurs.
The halving is a crucial element in the Bitcoin's blockchain design. It is the key element for the cryptocurrency's deflationary nature and its price development in the long term. So stay tuned for our next article, in which we will thoroughly discuss halving's role in crypto's value.
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