Introduction to the Bitcoin Block Reward Halving

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  • April 27, 2020
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What is the Bitcoin Halving? 

As part of Bitcoin’s coin issuance, whenever a block is produced (~ every 10 minutes) a miner is rewarded with a certain amount of Bitcoins. This reward incentives miners to contribute to the bitcoin network infrastructure. Approximately every four years, or more accurately every 210,000 blocks, the block reward is halved. This is called the Bitcoin Halving.

 

For the first four years of Bitcoins existence, 50 bitcoins were awarded to a miner for every block mined. The first bitcoin block reward halving happened in 2012, where the reward dropped to 25 Bitcoin. The second Bitcoin Block Reward Halving happened in 2016, where the reward halved from 25 Bitcoin to 12.5 Bitcoin  

 

Currently, the block reward stands at 12.5 Bitcoin. This will halve at the Third Bitcoin Block Reward Halving, to 6.25 Bitcoin around the 12th of May 2020.  

 

An interesting fact worth mentioning is that after this year’s Bitcoin Block Reward Halving, the inflation rate of Bitcoin will be lower than the current global annual average inflation rate.

The block reward will continue to halve until the year ~2140. 

What is the reasoning behind the Bitcoin Block Reward Halving?

Satoshi Nakamoto designed Bitcoin as a deflationary currency. Much like the idea of how gold becomes scarce over time. The issuance of Bitcoin is designed to decrease with time. This is meant to ensure that the asset becomes scarcer and scarcer with every coin mined. 

The halving decreases the amount of new bitcoins generated per block, in turn, reducing the supply rate of new Bitcoins. When referring to traditional markets, when a certain commodity is in low supply, and said commodity has a steady demand, the price of such a commodity increases. 

As Bitcoin becomes scarcer and the demand for it increases over time. Bitcoin will become a means to hedge against inflation as the price, guided by price equilibrium is bound to increase.  

Who controls the issuance of new Bitcoins? 

The Bitcoin network controls the issuance of new Bitcoins. This is done through consensus of all of the Bitcoin networks participants.

The rules for consensus include: 

  1. A total of 21,000,000 Bitcoins to be produced. The technical cap is 20,999,999.9769 Bitcoin
  2. A target of 10 minute intervals between each block 
  3. A halving event at every 210,000 blocks, every ~4years
  4. Block Reward will halve continually. Until it reaches 0 by year ~2140. This will happen at 33rd halving event at block 6,929,999

Any changes to these parameters requires all Bitcoin participants to agree by consensus to approve and implement a change.  

What happens to Miners during halvings? 

When the Bitcoin network reaches the Block Reward Halving. Miners will have their block reward cut in half. This can have implications on their profitability.  

In the past, many have speculated that miners would shut down after the halving. The reality is that most miners have been smart enough to price in the halving and avoid shutting down any of their operations. 

At the time of halving, mining profitability comes under significant pressure. Profitability is all dependent on Bitcoin’s price performance. Miners will experience a 50% decrease in bitcoin rewards, while their operating costs will generally remain fixed.

If miners decide to exit the market. The Bitcoin network could experience a reduction in hashrate and therefore security, although today the network’s security is very high after reaching all time highs in March 2020 around 16.55 TH/s.

 

One day the Bitcoin block reward will stop halving and the reward for mining a block will be 0 Bitcoin and Miners will earn Bitcoin in the form of transaction fees. These transaction fees typically represent between 4-8% of the total block reward and they have been increasing over time. Whether or not transaction fees will be enough to compensate miners remains to be seen. The topic of transaction fees to compensate miners will be in the spotlight as Bitcoin lives on.

Conclusion

For Bitcoin to honour the definition of sound money the supply of Bitcoin follows a disinflationary supply curve. As we have seen from assets like gold, which also follow a disinflationary supply curve, deflationary assets prove to be better vehicles to store value than fiat currencies, which are inflationary assets. 

 

The 3rd Bitcoin Reward Halving will reduce Bitcoins annual supply growth rate from 3.7% to 1.8%. This is significant because it will be the first time in history that Bitcoin’s supply growth rate is lower than the 2% inflation targeted by most central banks around the world. 

 

Bitcoin is one of the best performing assets of the last 10 years and it is showing resilience during these uncertain times.  

 

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