In July, a major event is going to happen in the Bitcoin ecosystem: the Bitcoin reward halving. Essentially, what this means is that the rate at which new bitcoins are created will be permanently reduced by 50% which will ultimately have an impact on the ecosystem. But first…
What is the Bitcoin reward halving?
To understand the Bitcoin reward halving, we must first understand how bitcoins are created.
Bitcoin is generated every time a miner solves a block. The successful miner finding a new block is rewarded with newly created bitcoins and transaction fees.
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Mining is essentially a record-keeping service. Miners keep the blockchain consistent, complete, and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions called a block.
The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks, or approximately every four years.
The reward started off at 50 BTC per block in 2009 and decreased to 25 BTC per block in late-2014. Starting from mid-July 2016, miners will get 12.5 BTC per block, marking the beginning of the 3rd Reward Era.
The amount of new bitcoins awarded to miners will drop from 3,600 BTC per to 1,800 BTC per day, and supply will decrease from 9.09% to 4.17% per year.
Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins will be reached in 2140. Then, record-keeping will be solely rewarded by transaction fees.
The Bitcoin protocol was designed this way to simulate a commodity, like gold. Since money creation is limited to a finite number of bitcoins, there will be a point where, as demand rises, the value of the currency will only go up.
The fact that bitcoin is a deflationary currency won’t necessarily prevent it from thriving as many other deflationary currencies have flourished in the past, according to Simon Johnson, a professor of entrepreneurship at the MIT Sloan School of Management.
Johnson argues that the idea that people won’t make payments with something that is finite and considered as a store of value, is incorrect.
Others believe that persistent deflation encourages people to hold their cash as it becomes a way of earning a return. In this scenario, the economy would be starved of funds for investment and won’t be able to grow, according to Matthew Yglesias, an economics journalist at Slate.
That said, bitcoin is still in its early days, and while its faith is still uncertain, what is sure, though, is that the cryptocurrency remains a relatively small part of financial sector. Compared to the US$1.4 trillion in the US currency in circulation, bitcoin’s modest market capitalization currently stands at a humble US$10 billion.
In the Bitcoin world, nothing is predictable, and yet, at the time when the Bitcoin reward halving is about to happen, one question remains in everyone’s mind: how will this affect the bitcoin price?
Some believe that the bitcoin price will surge given the slower pace at which bitcoins will be created (thus, the shortage in supply), and others, that the halving event is well known to the community and will not surprise anyone. The truth is, nobody really knows.
What we do know, though, is that the bitcoin price will reflect the general sentiment.
As Andreas Antonopoulos, information security expert, tech-entrepreneur and author, puts it:
“I predict the price will go up. And down. And then it will probably go up and down again, because the primarily driver of price is still, by a great extent, sentiment. ‘So the Halvening is coming, I think it will go up. Buy, buy buy!’ […] ‘I don’t know, I’m not too sure, I’m worried. Sell, sell, sell!’ And up and down we go, it’s going to be a rollercoaster, volatility will probably increase.
“My suggestion is: take a deep breath, relax, don’t try to play the casino, unless you are an experienced stock gambler – in which case, good luck to you -, seat back, relax, watch the fireworks and read the news about how bitcoin is dead or about to die because of the Halvening, and then wait until right after that when bitcoin is not yet dead.”
The Bitcoin Reward Halving Explained
by Oliver Carding