With Talk of the 2020 Halving and the Price of Bitcoin in the Future, What is ‘Halving’ Anyway?
Right now, the industry is only 2 years away from the next bitcoin halving event. With the halving comes predictions, estimates, and guesses about how the price of bitcoin will react. Though speculation runs high for halving events, many may not even know exactly what is going on. Because of that, we’re going to take a look at “halving” today and what its place is in the crypto world.
Halving in Proof of Work (PoW)
In our last discussion, we talked about the differences between proof of work (PoW) and proof of stake (PoS). If you haven’t read that already, we highly suggest starting with that post first. In order to really make sense of halving, it helps to first understand PoW. Halving only occurs with a PoW system, not PoS.
With a PoW model, miners get paid out for helping with the network not only by transaction fees, but with something called “block rewards” as well. Block rewards are the big payouts miners get when adding a new block to the chain.
While transaction fees are a nice bit of extra BTC for miners, they’re not the bread and butter. Block rewards are what make mining worth it. After a new block is added to the chain, the successful miner(s) get a sizable reward for their efforts.
Right now, the block reward for the Bitcoin network is currently 12.5 BTC. That means that every time a miner (or group of miners) adds a new block to the chain, they receive 12.5 BTC. At the current market rate of $7,485.64, that equates to the miners receiving roughly $93,570.5 per block. That’s not a bad pay out, is it? After a specified amount of blocks has passed (210,000 blocks specifically), that reward drops to half of what it currently is. This is what we call “halving” in the Bitcoin network. The block reward will be reduced from 12.5 BTC to 6.25 BTC after the next halving event. Right now, that’s estimated to be around the end of May 2020.
Now you might be thinking, “Okay, great, but why in the world would the reward be reduced? Don’t we want more people interested in bitcoin, not less?!” The answer is of course “yes, but we need to watch supply.”
Of course we want more people interested in Bitcoin! However, the original idea was to have a limited supply of bitcoins. If we were to continue to pay out the same block rewards infinitely, then how would we keep the supply limited? (Pro tip: we couldn’t!)
To avoid the problem of ever-increasing inflation, the network uses halving. Halving allows the network to remain certain that there will never be too many bitcoins in circulation. From the beginning, Satoshi Nakamoto (mysterious founder(s) of Bitcoin) only wanted 21,000,000 bitcoins total.
To make sure the network doesn’t release too many bitcoins, the network reduces block rewards over time. After 210,000 blocks have been added to the chain, the block reward drops to half that. Then again, then again. With this “halving” fully implemented, we never have to worry about there accidentally being more bitcoins than intended.
The reason halving has been covered by various outlets recently is because we’ve just passed the mark for what is generally the halfway point to the next halving. We know, that’s a lot of “half” talk! But, it’s an interesting topic to cover. Historically, the price of bitcoin has jumped after a halving, so many are making predictions now about where they think we might be in two years time.
The cryptocurrency industry may be nonexistent in two years time. Or, who knows, maybe the crypto world will be the new gatekeepers of the financial industry. There are all sorts of possibilities.
While we don’t know what the industry will look like at the end of the 210,000 blocks, we do know that miners will only be getting 6.25 BTC. What are your thoughts?