Bitcoin has been surging this year and is up 151%. Right now is close to the psychological $10,000 level. Some news articles call for the cryptocurrency father to move up between $50,000 to $400,000, and mentions the Bitcoin Halving as one of the events that might push it to these record prices. So, what in heaven is that Bitcoin Halving?
To answer this, let’s review how bitcoin transactions are performed and also how Bitcoin is mined.
To send or receive bitcoins, the sender and the receiver must use a wallet. Bitcoin addresses have one private key and one or several public keys. To send some Bitcoins to another address, a notification is cast to the Bitcoin Network.
The Bitcoin Network, as we all know, is a distributed network of computers that hold the complete keychain of all Bitcoin transactions to date. When a new notification of a transaction is received the network processes it assuring the sender has enough bitcoins to do it, and all the proper authorisations( Keys) are correct. Once this is checked, the transaction is assigned to block and confirmed.
According to the bitcoin.org faq “Mining is the process of spending computing power to process transactions, secure the network, and keep everyone in the system synchronised together.”
Mining is a fully decentralised process, operating in all countries, so no single person has the complete control of this operation. This process is called mining because it is similar to a conventional mining operation in that this is also used to issue new bitcoins. Miners get paid for finding new blocks and perform the confirmation of the transactions.
Anybody can become a Bitcoin miner by running software with specialized hardware. Mining software listens for transactions broadcast through the peer-to-peer network and performs appropriate tasks to process and confirm these transactions.
– Source: Bitcoin.org Faq
Therefore, mining is the process that keeps running the bitcoin network and also the means to pay miners for their work.
A new block must contain a proof-of-work (PoW) to be accepted. The system used is based on Hascash, a “proof-of-work” scheme developed by Adam Black. This PoW requires miners to find a number called a nonce. The PoW is easy to verify for any node but remarkably time-consuming to generate.
The mining operation has been conceived in such a way as to extract a block every 10 minutes. The difficulty target is adjusted based on the recent network performance to achieve this 10 minute per block goal about every 14 days. Therefore, there is a constant stream of new blocks at a rate of one every ten minutes.
Image 1- History of the difficulty to find a block in semi-log scale. Credits Ladislav
The Halving Process and the Bitcoin Supply
In the centralised economies that currently are ruling all countries on Earth, the monetary base is controlled by central banks at a rate that supposedly matches the economic growth. But we have seen in recent years how central banks have engaged in what is known as Quantitative Easing to halt financial crises and push up the economy again. Quantitative Easing is just money printing at a large scale and has been implemented for several years so far.
Instead, the idea behind the Bitcoin was to have a decentralised electronic currency on which the monetary base could be regulated only by an algorithm.
The Bitcoin algorithm has defined in advance how many bitcoins will be in circulation. The algorithm of the Bitcoin is set so that the number of bitcoins that can be created is limited to 21 million units.
To achieve this, the adjusting parameter is the reward for finding a new block. This reward is adjusted by the algorithm and is cut in half every 210,000 blocks or approximately every four years.
Currently, every newly found block means a reward of 12.5 newly created bitcoins, plus the transaction fees processed using this block. The next halving will cut that reward by 50%, reducing it to 6.25 BTC.
When will the next halving event occur?
As already said, since the rate of block output is six per hour, 210,000 blocks will take four years to create. The previous event happened on July 9, 2016, so, the next one is expected to occur between May and June 2020.
Halving and the Bitcoin Price
There is no right answer to that. Some articles point to a bitcoin appreciation. Since the cost of bitcoin creation will double, it seems logical to think that the market, a place to define the consensus value of our investments, will agree and increase BTC value.
Also, supply and demand theory could make us think that, since the new supply will halve, the price should increase. But the new supply is a minimal fraction of the total supply.
Looking at history, in 2016, the last time a halving occurred, not much happened to the Bitcoin price. It was trading at $650 the week the halving happened and $675 the following week.
The truth is that the Halving Event is well-known to all. So maybe we should follow the rule “buy the rumour, sell the fact”.