You might have heard of it on Twitter or on your favorite podcast, the famous Bitcoin halving. Some prefer to call it The Halvening or the Halfin, in tribute to the second Bitcoin user and renowned cryptographer, Hal Finney. Like the US presidential election, you can catch this event only once every four years. Conversely, no one can influence the outcome.
Why is The Halving such an important event and a main component of Bitcoin’s value proposition? This piece will be exploring where bitcoins come from, what role the Halving plays, and why it’s so important that everyone and their grandmother should be aware of it.
Where Do Bitcoin Units Come From?
In 2020, if you want to get some bitcoin, you can go to any online exchange like BTSE, send a wire transfer, and you’re good to go. There’s a tremendous market where buyers and sellers meet everyday to execute transactions and to create price discovery.
In the early days of Bitcoin, it wasn’t so easy. To obtain bitcoin back in 2009, the only way (other than being gifted some) was by participating in a process called mining. This function allowed you to put up your computer resources and competitively guess a large randomly generated number before anyone else on the network did. Simultaneously, you would be aggregating broadcasted transactions of Bitcoin users from around the world. If you were successful in hitting this digital lottery first, you were able to propose the next block of valid Bitcoin transactions to your peers. In exchange, your time and computational resources were rewarded with newly created bitcoin.
If you try to mine Bitcoin with your laptop today, the chances of success are negligible. Bitcoin mining has scaled into a billion dollar industry, with organizations of thousands of specialized machines competing for the block reward (the newly issued set of bitcoin) every second of every single day. Even in the face of the COVID-19 lockdowns, Bitcoin miners soldier on.
Bitcoin is a story of digital commerce, where a new episode airs every 10 minutes on average. These aggregations of Bitcoin transactions are referred to as blocks. Every new block is added to the series and becomes its latest chapter in an ongoing saga that will very likely never be rewritten. Blocks are vetted by every computer running the Bitcoin software: validating that all transactions within the block were in line with the consensus rules of the network. Once the block containing your transaction is validated, your wallet will let you know that you’ve reached 1 confirmation. As soon as more blocks follow, your confirmations will keep increasing proportionally and your transaction will be considered more and more irreversible.
When Bitcoin’s pseudonymous creator Satoshi Nakamoto released the source code, no units existed. Upon mining the first block, Satoshi was rewarded with 50 bitcoin. That process has continued for each subsequent block, roughly every ten minutes, to this day.
Now you may be doing some cocktail napkin math here and realizing that things don’t quite add up. Since a block happens every 10 minutes theoretically, and 11 years have passed… how come there are only around 18 million bitcoins then? Shouldn’t there be much more than that by now?
That’s Where The Halving Comes In
An integral part of Bitcoin is its supply limit. There can only ever be 21 million bitcoin under the enforced protocol rules. That means if you own 1 bitcoin today or 100 years from now, it will forever represent the same amount within the whole set. No one can diminish your piece of the pie by printing more than that predetermined hard cap. Try doing that with a US dollar.
In order to respect the supply limit, the block reward must be reduced and eventually ended at a certain point. This must be done in a way that miners’ incentives are maintained, since they are essential to the security of the network. So how did Satoshi plan this?
In the previous image, we can observe that a recurrent event happens every 210 000 blocks, approximately every four years. This event reduces Bitcoin’s block reward in half. That’s the magic of the Halving. It was included in the protocol by Satoshi Nakamoto, and it is what determines Bitcoin’s scarcity, giving value to each unit we hold. Want to change it? Great – you’ll just need the consensus of every other network participant to do so. Let me know how that goes!
We’re currently on the cusp of the 3rd halving, where the block reward will reduce from 12.5 bitcoin per block down to 6.25 bitcoin per block. We can’t know for sure on which exact day it will fall, since the Bitcoin protocol isn’t aware of the time, but we know it will happen on block 630 000, and by this site’s prediction, it will fall on the 13th of May.
Why Should Your Grandmother Know About It?
2020 has been… different. Regardless of the country you are situated in, your age, your gender, your religion, or your nationality, you have to deal with the Coronavirus crisis. The whole world economy has stopped with much of the planet’s population under voluntary or enforced lockdowns, while governments prop up banks and overleveraged corporations while dropping helicopter money on households so that citizens can survive.
Is it wise to hold money in artificially inflated company stocks that aren’t producing or selling? Even worse, how will your government’s fiat currency be influenced by their rigorous spending, which more often than not requires them to “BRRR” the money printing machine? Does this sound sustainable?
The reality is that the pieces of paper in your wallet or the digits in your bank screen have little to no intrinsic value, and as days go by, they lose their value even more. At the same time, Bitcoin’s newly issued supply is reducing. The same amount of work is only going to yield half the reward. True scarcity in the face of “unlimited” money printing.
Miners, like all businesses, need to pay their bills every month. Rent, electricity, and equipment make up the main costs to run their operations. Electricity suppliers rarely accept bitcoin as a payment, so miners are required to sell a portion of their mining reward to make ends meet.
Miners provide a significant portion of the supply that buyers can acquire on the market, and this continued sell pressure adds up. Around the 13th of May, that new daily supply is reducing in half. Even if only half the current demand for new coins is maintained, the price would maintain these levels. In a world of doomed-to-fail monetary policy that throws common sense out the window, how do you think Bitcoin will fare? I’ll let you decide.
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