Crypto and Coin

What is Bitcoin halving?

July 19, 2019

With Bitcoin, the reward keeps dropping!

If you are following Bitcoin and cryptocurrencies news you might have read about halving (or halvening) and everyone getting excited around it. Whether you think it’s going to send the price of Bitcoin to the moon or tank it down, you might want to understand what halving is in the cryptocurrencies world. Halving is not specific to Bitcoin. It also occurs in other currencies like Litecoin for example. Let’s dive into it!

Software as rules

Bitcoin is digital money obeying a set of rules and these rules are enforced by software. One of these rules is that (unless the majority agrees to change it) there will be 21 million Bitcoins (actually, 20.99999998 million) in circulation around the year 2140. That’s it, no more Bitcoins created by miners after this year!

Bitcoins are created as a reward to the miner discovering the block. A block contains multiple transactions. One of these transactions is special because it attributes an amount of Bitcoin to the miner. This transaction is called the coinbase transaction. It’s the first transaction in the block!

One block is discovered around every 10 minutes so the same amount is given to miners every 10 minutes until we reach 21 million Bitcoins, right?

That's not what happen in Bitcoin!

Nope!

This fixe amount changes in time! The reward is halved every 210,000 blocks! It means that the Bitcoin creation speed is getting slower over time.

Bitcoin Monetary Inflation

source of the image: http://bashco.github.io/

When does halving happen?

Halving has already happened twice to this day:

  • First halving occurred on 28 November 2012, the reward goes from 50 BTC/block to 25 BTC/block
  • Second halving occurred on 9 July 2016, the reward goes from 25 BTC/block to 12.5 BTC/block

Next halving is planned for 19 May 2020 according to bitcoinblockhalf and the reward will go from 12.5 BTC/block to 6.25 BTC/block ! The reward is halved every 210 000 blocks so the halving date depends on the speed at which the blocks are mined.

There will be a lot more halvings until the year 2140!

Why does Bitcoin halving happen?

Bitcoin halvings happen because it’s written in the software that it must happen. It’s intentionally designed this way. But what are the intentions?

  • Creating an incentive for early miners. It’s very common in any early-stage project to reward early adopters!
  • Make Bitcoin adopt the same behavior as gold. Think about it, if you have a finite amount of something (like gold), it’s a lot easier to find gold when there is plenty of it than when almost none of it is left.
  • When there is no Bitcoin left to mine, miners will only get rewarded with fees. Having a curve like this smoothen the transition between the early stage (no transactions so no fees, only block rewards) and the late stage (only fees, no block rewards).
  • As Bitcoin price is raising there would be too much competition between miners and the energy consumption would skyrocket. Diminishing the reward makes the competition/reward ratio healthier.

What are the consequences of Bitcoin halving?

Trying to predict Bitcoin price is a dangerous game...

When a halving happens, the block reward is halved. It means that new Bitcoins are mined twice slower than they used to.

There are a lot of articles out there talking extensively about the price so I won’t go into details but most of the time in economy, scarcity means an increase of value. You can expect a price surge just after the halving if demand stays constant.

Keep in mind that I’m just a modest human being and not a seer. You should stay at a safe distance from people predicting things…

What happens if miners don’t cut their reward in half?

Miners create blocks. They chose which transactions are inside that block and they add the coinbase transaction on top of that. What if a miner decides that he wants the full reward and not the halved reward?

Here is what would happen: the miner would create the block and broadcast it to full nodes around him. Nodes would check the block, see that something is wrong and just discard it. That’s it!

So the miner would have consumed energy (he is paying for that energy) and get no benefits at all in the process! Bitcoin is a game that is hard to cheat…

Conclusion

  • Bitcoins are created as a reward for miners for every block created
  • This reward is cut in half every 210,000 blocks
  • 2 halvings have already happened. Next one is for May 2020
  • Halving exists for multiple reasons including having the same behavior as gold discovery
  • Following offer and demand, price should go up but who knows?
  • Miners can’t cheat the halving game. Nodes are watching!

Having a question or suggestion about the article?

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