One of the most important features of bitcoin and other PoW (Proof of Work) coins/tokens is that there is a cap on the number of coins that will ever be in circulation. The creation of new bitcoins can be predicted accurately and is transparent to everyone. This is different from the banking world, where central banks can print unlimited money.
An important term in the bitcoin world that comes with this is the block halving. What does this mean exactly, and why is this important? We will use Bitcoin (BTC) as example to explain but same applies to other cryptocurrencies like Litecoin, Zcash, Digibyte and many more.
Everything you want to know about Bitcoin block halving.
To understand Bitcoin block halving it is useful to know how new bitcoins are created.
Bitcoin has a limited amount of coins that can be created. A total of 21 million bitcoins will eventually be put into circulation. A little less actually, to be precise, a total of 20,999,999,9769 bitcoin will be created. These bitcoins are released at a predictable rate by means of block rewards.
A block reward is a reward for miners. Miners play an important role in the bitcoin network. They ensure that the transactions are verified, processed in a block and added to the blockchain. This is a fairly technical process. It is important to know that this process takes a lot of computer power and electricity.
The investment by miners of special built computers (example antminer) and electricity/power ensures that the network is well protected. Miners don’t do this for nothing. They receive a reward for this. This reward is issued in the form of bitcoins and is called the block reward.
Currently, the pay per block is 12.5 bitcoins. This reward is halved approximately every four years. This halving is called the bitcoin block halving. Curious when the next halving is? You can check out this page where a countdown clock is available.
What is a bitcoin block halving?
The bitcoin block halving is the moment when the reward for miners is halved. This halving takes place every 210,000 blocks. How long does it take to get there? Miners add a block to the blockchain every ten minutes on average . Based on this data, a bitcoin block is halving approximately every four years.
What does the bitcoin block halving mean for miners?
Creating bitcoin is expensive. It costs computer power and lots of electricity. Miners earn money when their income exceeds the costs. With costs you can think for example of electricity costs, hardware, and insurance of the hardware.
The bitcoin block halving ensures that the reward in bitcoin halves every four years. In this way, miners know precisely the day/time when the reward in bitcoin is halved. In that respect, the block halving provides more certainty for miners. But there is also uncertainty. The delivery time of mining equipment has been unstable for years, just like the computing power on the network.
But on the other hand, halving the reward in bitcoin does not necessarily mean halving the reward in euros or dollars. Does the demand remain constant and is the supply growth slowing down? Then the price can rise in the future. But the role of transaction costs can also become greater. In this way, miners still receive sufficient compensation for their work.
What happens to the reward after a bitcoin block halving?
After a block halving, the number of bitcoins that the miners receive when they find a block is halved. They first received 50 bitcoins for each block, then it became 25 bitcoins and now the reward is 12.5 bitcoins. What value this represents in a fiat currency (EUR/USD/GBP) depends on the current market rate.
Some traders believe that the bitcoin block halving directly influences the price. In 2012, for example, the first halving took place. A year later, bitcoin reached an all-time high. This also happened the year after the next halving, in 2017.
How is that possible? Currently, approx 1,800 bitcoins are mined every day. The vast majority are sold directly by the miners to cover the costs of their equipment. Is the reward cut in half? Then the sales pressure decreases. This could have positive results for the price of bitcoin.
Will this also happen at the next halving? Cryptocurrencies are extreme volatile and remains unpredictable we really can’t predict what will happen with the next halving.
What happens after the very last block halving?
After the last bitcoin block halving, miners no longer receive a block reward. They will then only earn bitcoins through transaction costs. Transaction costs will therefore become increasingly important in the future.
But will transactions also become more expensive in the future? That is not necessarily necessary. There are developments on the bitcoin network to keep transaction costs manageable.
An example is the Lightning Network. The Lightning Network ensures that transactions are executed in a second layer on the blockchain and not on the blockchain itself.
Smaller transactions will probably take place on this network in the future. The transaction costs for this type of transaction are not high. This way, bitcoin transactions remain affordable/low cost in the future.
But this is all in a far away future. We will not even experience the last bitcoin block halving ourselves. According to calculations, the last bit of bitcoin will be mined in 2140.
Note: This is not investment advice, this is purely for informational & educational purposes, do your own research & verify.