The Bitcoin Halving has taken place

On Monday evening around 21:25 the Bitcoin Halving took place. At that time, the amount of new bitcoins that miners can mine per block halved from 12.5 BTC to 6.25 BTC. As a result, the cost of new bitcoins doubled and annual inflation in the bitcoin economy fell from about 3.6% to about 1.8%. Monetary inflation in the bitcoin economy is therefore lower than inflation in Western economies for the first time.

When the 630,000th block was mined from the bitcoin blockchain, something special happened: the Bitcoin Halving. During this pre-programmed event that takes place once every four years, the amount of bitcoins that miners can find per block halved. Before the halving, the so-called block reward was still 12.5 BTC per block, but after the halving, each block only contains a block reward of 6.25 BTC per block.

Inflation

This has important consequences for the bitcoin economy. Bitcoin mining is the only way new bitcoins can enter the market and how the total amount of bitcoins in circulation can increase. Halving the amount of bitcoins that miners can find therefore also means a halving of monetary inflation in the bitcoin economy.

It fell from about 3.6% to about 1.8%. Inflation in the bitcoin economy is therefore for the first time lower than the target of 2% that central banks in Western economies use. Bitcoin therefore has a lower monetary inflation rate than the dollar or euro from now on.

In the future, inflation will continue to halve every four years and eventually level off completely in 2140.

Supply & demand

The supply of ‘freshly’ mined bitcoins on the market drops by half due to the halving, while no comparable effects occur with regard to demand. Since the bitcoin price is determined by supply and demand through market forces, this can influence the price. That is perhaps a bit like the effects on the gold price that would occur if global gold production were to decrease by half.

On the other hand, governments and central banks worldwide are creating new regular money on a large scale. Market forces also apply here: due to an increase in money, the supply of the currency on the market grows and that depresses its price.

So there is more and more money in circulation that loses value in order to buy up a limited and dwindling supply of bitcoins. Because of the economic implications, many bitcoiners find this an interesting and exciting development.

It is likely that the economic effects of the halving will not penetrate the market immediately, but gradually, because the daily amount of newly mined bitcoins is only a relatively small part of the total amount traded daily.

Price volatility before, during or shortly after the halving is likely due to speculation. The violent price movements we have seen in recent days are probably part of this.

Miners

The halving also has all kinds of consequences for the miners. They saw their earnings in bitcoin drop by half, while they basically have to use the same amount of processing power (and therefore electricity). The cost to mine a bitcoin has therefore doubled due to the halving.

Miners who are no longer profitable as a result can now choose to sell newly mined bitcoins below their cost or wait for a higher price. The first option is of course not very attractive, but may be necessary for some miners to cover the costs. If miners are loss-making for too long, it can lead to them stopping mining altogether.

If that happens, the hashrate of the network drops and blocks are less likely to be found. Miners can therefore again lose profitability because they are less likely to mine new bitcoins. Some fear that this will lead to a collapse of the network, a so-called ‘ death spiral ‘, but that is not the case.

The departure of unprofitable miners leaves more bitcoins for all other miners. As a result, their profitability increases again. This creates a balance in the ecosystem that ensures that only profitable miners remain.

Profitability for bitcoin miners largely depends on the price they pay for electricity. In practice, this often turns out to be cheapest near sustainable power plants, which regularly have to deal with energy surpluses that they have to sell below market price.

Bitcoin miners eagerly purchase this power and thus price the miners who use more expensive and often environmentally unfriendly power out of the market. More than 70% of the electricity used by the bitcoin network is now said to come from sustainable energy sources. Bitcoin halvings therefore make the network more efficient in a sense and perhaps also a bit more environmentally friendly.

Want to read more about the bitcoin halving? We previously wrote about it in an article and the announcement two weeks ago.

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