Every four years the amount of Bitcoin that goes as a reward for cryptocurrency diggers is reduced to a process also known as halving Bitcoin. In this article we explain why it happens and how.
Bitcoin supply limit
To understand the halving of bitcoin, we must first understand the theory behind the supply of Bitcoin.
Inventor Satoshi Nakamoto believed that scarcity would create value. After all there is only one point of the Mona Lisa, some of the Picassos and a limited amount of gold on Earth.
It was therefore determined that this digital asset would be limited to just 21 million Bitcoin.
The idea of limiting Bitcoin is at odds with how the US dollar or paper money works. This money was created with clear rules where creating a US dollar required a certain amount of it in reserves. I also know them differently as the gold standard.
Over time these rules fell with the modernization of economies and after the passage of financial difficulties like the Great Depression or World War II where the printing of money is needed to simulate the growth of economies in difficulty.
Satoshi Nakamoto believed that this devaluation of paper money would have devastating effects on bitcoin and so decided with a line of code to prevent one pair from printing more bitcoin.
What is halving bitcoin?
Integrated into the bitcoin code, it is a limit of 21 million coins. New bitcoins enter circulation through a process called digging. Excavators do the work by maintaining the network and processing transactions and receiving new bitcoin as a reward.
However every four years the reward is halved and along with it the rate of bitcoin digging drops until in 2140 no bitcoin is created anymore.
The first million bitcoins were mined by Satoshi Nakamoto in 2009. Since then nearly 89% of the amount has been mined and only 2.2 million bitcoins remain to be created.
- 2009 – The reward for block digging in bitcoin was 50 BTC
- 2012 – The first halving reduces the bonus to 25 BTC
- 2016 – second half reduces bonus to 12.5 BTC
- 2020 – the third half reduces the bonus to 6.25BTC
- 2140 – The 64th half happens that no bitcoin is created anymore
What is so special about halving?
If a person, group or government of a country is entrusted with the supply of money, there are also endless reasons why they should not be trusted. Bitcoin was created to be decentralized and reliable where no one controls it.
Since it is not controlled by an individual, group or state, it is difficult to set rules for how they are created.
By determining the total supply and applying the halving, the Bitcoin monetary system becomes impossible to change. This makes bitcoin similar to gold.
What happens to the diggers?
Bitcoin diggers invest money in buying specialized hardware and pay for electricity. Their cost is offset by the reward from digging, but what happens when the reward is halved?
As halving reduces the reward, even the incentive for diggers to work on the bitcoin network decreases over time and at the same time with fewer diggers the security of the network decreases.
Hence once the last bitcoin is dug up. Excavators will receive rewards in the form of transaction fees for maintaining the Bitcoin network.
Currently these fees constitute only a small amount of total revenue. Excavators currently dig 900BTC per day, but earn between 60 and 100 BTC in transaction fees.
In short, tariffs currently make up 6.5% of revenues but in 2140 they will make up 100%.
How does the halving affect the price of Bitcoin?
The debate over whether halving the price of bitcoin continues to this day. Normally demand should increase and as a result the price.
Historically during the past halves, the price of bitcoin has risen but other factors have also influenced. In June 2016 bitcoin was around $ 660 after halving but continued unchanged for a few days until it fell to $ 533 in August.
It then rose to a record $ 20,000. Similar to 2020, bitcoin increased from $ 9,000 to $ 27,000 at the end of the year. / PCWorld Albanian