Is There Life After Halving?
With the ongoing coronavirus pandemic, the collapse of the world economy, rising inflation rates, cancelled Victory Day parades and total self-isolation, the imminent halving that is approaching the crypto community looks apocalyptic to many. This article will help you understand what it is to respond adequately and to avoid impulse operations.
What is halving and what does halva have to do with it?
What is halving? Halving means reduction by half (halva, a type of Middle Eastern sweet confections, has nothing to do with it). In the world of cryptocurrency halving means an event that occurs every four years and reduces the speed of Bitcoin production by half. As many of you know, Bitcoin (BTC) has a finite supply. The production of Bitcoin will cease to continue after all 21 million BTC has been mined. It’s one of the reasons why Bitcoin is often referred to as “digital gold”.
Just like gold, it has a limited supply and at some point all of it will be mined. Currently about 18 million BTC have been introduced into circulation which accounts for nearly 85% of the total amount of BTC, yet it doesn’t mean the remaining amount will be mined any time soon. The reason is the protocol, which has been coded into the blockchain from the very beginnig: Every 210,000 blocks, it performs the so-called Bitcoin “halving” or “halvening,” and producing new coins becomes more difficult. More precisely, the protocol cuts the block reward in half. So, every time a Bitcoin halving occurs, miners begin receiving 50% fewer BTC for verifying transactions.
What is a block reward?
A block reward is the amount of BTC that miners receive for every new block added into the blockchain.
To explain this concept in more depth, let’s briefly go back to the technology that gave rise to Bitcoin — the blockchain. In the most basic sense, a blockchain is a digital ledger that stores information about its transactions in blocks that are each around 1 MB in size. For example, when person A sends Bitcoin to person B, this transaction will be stored on a block, along with around 500 other transactions that happened at around the same time.
A block reward is the amount of cryptocurrency that miners receive when they successfully validate/mine a new block by solving highly complex mathematical problems using their mining ASIC’s. A block has a TxFee (a fee paid by person A when sending BTC to person B).
Today there are a few critical questions that are puzzling those involved in crypto circulation.
For instance, what reward will miners receive after the next halving? Let’s make some calculations to answer this question.
Every new block will produce 6.25 BTC. At inception, the reward was eight times as much.
When Bitcoin was launched in 2009, miners were receiving 50 BTC per block. Thus, a total of 10,500,000 BTC was generated before the next halving took place in November 2012, when miners began to receive 25 BTC for each block. The next halving was 10,500,000 BTC. It may seem like an overly generous bonus (more than $365,000 per block, based on current value), but the network was only starting to develop at the time, and no one knew whether people would continue to find the concept worthy of investing their computer processing power into the Bitcoin blockchain to keep it alive. The concept caught on and now halving is hanging over miners every four years like the sword of Damocles.
It happened on May 11 or 12, depending on where you were based. A couple of weeks ago the date was still not 100% certain, because the time taken to generate new blocks could speed up or slow down. On average, the network produces one block every ten minutes. The very last halving is expected to occur in 2140 as the 21-millionth BTC is mined. Once that happens, miners will stop receiving block rewards for solving mathematical problems.
Naturally, the motivation drops proportionally, especially in solo miners with lower hashrates. At this point, the majority of Bitcoin mining is performed by giants like Bitmain, a China-based company that was worth $12 billion at some point in 2018. Bitmain validates blocks with extremely powerful and high-energy-consuming machines, which are much more efficient compared to the basic ASIC’s used by regular miners.
As the block reward becomes less significant, solo miners that are barely covering production costs will be forced to quit the market. There will still be firms willing to mine Bitcoin at the reduced rate, but the market might become less decentralized as a result (i.e., the pie will be cut into fewer pieces). Still, BTC mining in coalitions known as mining pools, such as EMCD Pool, may be a solution.
Historically, the price has gone up following a halving, but it ultimately depends on the supply/demand ratio. Essentially, Bitcoin halving cuts down the supply of BTC, making the asset more scarce. If there is demand, the price is likely to increase. There are also some historical precedents. On November 28, 2012, the day of Bitcoin’s first halving, the cpryptocurrency’s price rose from $11 to $12, and continued to climb up throughout the next year, reaching $1038 on November 28, 2013. Roughly four years later, a month before the second halving, Bitcoin’s price started to follow a similar pattern. It surged from $576 on June 9 to $650 on July 9, 2016 — the day the block’s reward was reduced by half for the second time in the asset’s history.
Again, BTC continued to accelerate through the next year, although with occasional turbulence, and traded at $2526 on July 9, 2017. Will it be the same next time? Skeptics believe that the halving has already been priced in (remember 2019’s systematic price increase?). Although, there is no scientific way to verify this.
So, miners are familiar with halving and it can be predicted. Once you read the news about the crypto industry for the last two days of rate reduction, you’ll see that there is life after halving after all.