The Bitcoin Halving is coming

In about two months it will finally be time: then it will be time for the long-awaited ‘ Bitcoin halving ‘. That is when the amount of bitcoins that miners can mine per block halves. At the moment, the miners still receive 12.5 BTC per block, but after the halving that will only be 6.25 BTC. With this, the inflation of the money supply in the bitcoin economy will for the first time be lower than the target number that economies worldwide use.

The ‘ Bitcoin halving ‘, ‘ the halving ‘ or simply in Dutch ‘de halving’ are different names for the same event: the moment at which the amount of bitcoins that the miners can find in each block halves.

Halvings are programmed into the Bitcoin code and take place every 210,000 blocks, roughly once every four years. So far there have been two Bitcoin halvings: in 2012 and 2016. The third Bitcoin halving is now imminent and will take place in about two months.

Due to a changing hashrate of the miners, the exact date is difficult to predict, but according to current expectations, the next halving will take place around May 12, 2020.

Bitcoin halving

In the beginning when Bitcoin was launched in 2009, the miners still received 50 BTC per block as a block reward . After the first Bitcoin halving in 2012, the block reward decreased to 25 BTC per block. The second halving in 2016 reduced that even further to the 12.5 BTC per block that applies today. After the next halving on block 630,000, each block will only contain 6.25 BTC.

This process repeats itself until the number of bitcoins that can be mined per block has decreased to less than the lowest possible amount of bitcoin: 1 satoshi. That will probably be around the year 2140. After that, a further halving is no longer possible and the miners will no longer receive block rewards.

There will then be a total of 20,999,999.9769 bitcoins in circulation; about 21 million units. That is the maximum amount of bitcoins that will ever exist. That number was therefore not just invented, but a mathematical consequence of the halving mechanism.

The vast majority of these 21 million bitcoins are already in circulation. Over the years, about 18.2 million bitcoins have been mined. So for the next 110 years there are only 2.8 million bitcoins left to mine. More than half of that will be mined even before 2030.

Economic consequences

The miners therefore find fewer new bitcoins after each halving and can therefore sell fewer bitcoins on the free market. Since markets are basically driven by supply and demand, some expect that this could have beneficial effects on the bitcoin price. After all, the supply of new bitcoins on the market drops by half due to the halving, while no comparable effects occur with regard to demand.

However, the question is whether these effects will penetrate the market immediately. The daily supply of new bitcoins on the market is relatively small compared to the total trading volume and the economic consequences may therefore only gradually penetrate the market. Still, speculation could lead the price to react to the developments sooner.

Inflation

The pre-programmed, predictable, and unchanging emission of Bitcoins into the Bitcoin economy is one of the features that fundamentally differentiate Bitcoin from traditional currencies. Traditional currencies usually aim to keep inflation stable at around 2%. The value of the money then decreases annually by an equal percentage. Consumers and citizens can experience the effects of this through rising prices for goods and services.

In principle, there is no limit to the maximum amount of currency that can be put into circulation with traditional currencies. If economic policy fails, it can even lead to hyperinflation. In many Western countries, however, it mainly means that wealth is generally not stored in traditional currencies, where it loses a little value annually, but in assets such as shares and real estate.

Scarcity

Bitcoin, on the other hand, operates on the basis of scarcity, much like gold and other precious metals. There can never be more than 21 million bitcoins. Initially there is inflation of the amount of bitcoins, but that decreases rapidly to a negligible level and eventually flattens out completely in 2140. At the moment, the inflation in the Bitcoin economy is just under 4%, but after the upcoming halving that will decrease to less than 2%. It will therefore be lower than inflation in most Western economies for the first time.

This inherent and unchanging economic policy makes bitcoin, according to some, extremely suitable for storing wealth ( store of value ) and therefore better than traditional money. The economist Saifedean Ammous even states in his (extremely accessible) book The Bitcoin Standard that Bitcoin is the “hardest” money the world has ever seen. More recently, Bitcoiner PlanB also made an important contribution to this line of thinking with its now much-discussed economic Bitcoin Stock-to-Flow analysis.

Miners

The Bitcoin halving is also an important moment for the miners. After all, from one day to the next, the miners only earn half of their bitcoins, while they still have to use the same amount of energy (and therefore money) for it. A bitcoin halving therefore ensures that the cost price for a bitcoin increases. Some see this as a reason why the halving can have a favorable effect on the bitcoin price. After all, miners will not like to sell their bitcoins below cost.

However, others point out that miners may also decide to turn off their equipment because they are no longer profitable. A decrease in the hashrate could be the result. However, Bitcoin has a so-called ‘ difficulty adjustment mechanism ‘ that automatically adjusts the mining difficulty to restore balance and profitability. There is no question of a sometimes feared ‘ death spiral ‘, in which the reduced profitability causes a domino effect of miners turning off equipment.

Click here for a timer that counts down to the next Bitcoin halving.

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