Halving is an ingenious inflation control tool that differentiates bitcoin from all FIAT currencies such as the Euro and Dollar.
Bitcoin is self-regulated
We know that all the so-called FIAT currencies such as Euro and Dollar are controlled by governments and central banks, which regulate their issuance, not substantially respecting the established rules (even more so since 1971 when the Bretton Woods agreements, which provided for the convertibility between dollar and gold, were abolished).
Bitcoin, on the other hand, does not have central control, boards of directors or managers: how is the amount of money to be issued regulated?
As early as 2008, Satoshi Nakamoto, the creator of Bitcoin, had a brilliant idea: to remove the human factor from the financial equation.
What would replace the human factor?
Satoshi drew up a visionary program that would last over a hundred years, so Bitcoin would be constantly self-regulating.
Its users would not have to worry about sudden political or economic changes or problems like inflation.
For Bitcoin to be valuable, in fact, it had to be scarce, as gold is for example. That is why the most important point of Satoshi’s plan was never to exceed the limit of 21 million bitcoins.
To maintain the scarcity over time, considering that bitcoin would grow and the market would change, Satoshi devised a second solution: halving.
This would allow the long-term release of new coins, in a predictable and unchangeable way.
But how are bitcoins created?
Understanding Mining to understand Halving
Mining is the process of creating new bitcoins. New bitcoins are created every time the miners confirm transactions and add a block to the bitcoin blockchain. The miners are paid for contributing to the network with newly minted bitcoins.
The mining process is like a math competition, where the miners try to solve complex problems and whoever solves it first gets new bitcoins as a prize.
Mining initially gave a high reward in bitcoins, and the competition was very low.
In the last 12 years, however, the stakes have risen and the competition has gotten tougher. In 2020 we have computers designed for bitcoin mining and real industries specializing in this business.
Moreover, the price of bitcoin has risen dramatically and the reward has gone down.
But why has the reward decreased?
What is the Halving
In the early years of bitcoin, the reward was 50 BTC for each newly mined block.
At today’s prices, it would be over $250,000, but let’s take into account that back then the price of Bitcoin was below 50 cents.
The mind behind Satoshi Nakamoto’s name had already foreseen this and to balance the creation of currency by avoiding inflation, it established a halving program.
The term halving refers to the halving of the reward bitcoin miners receive and, consequently, how many bitcoins are created with each block.
The halving program planned by Satoshi is very gradual: since 2012 it happens about every 4 years (every 210,000 blocks to be precise), just like the US presidential elections or leap years.
The Halving Effect
As time went by, along with the succession of halvings, the number of bitcoins produced decreased. Bitcoin has therefore maintained its scarcity. We said that in order to have value, an asset must be scarce: to support this thesis comes the first halving in 2012. As a result of the reward going from 50 BTC to 25, the price of Bitcoin went up from $2 to about $270.
At the second halving, in 2016, it reached the value of $700, after which it continued to increase until the all-time high in early 2018.
The next halving, which will reduce the reward to 6.25 Bitcoin, suggests that history could repeat itself. But we know that anything can happen and no one can predict the future. As we’ve seen, the scenario has become more complex since previous halvings and the bitcoin trend has changed a lot since the dawn of the most famous cryptocurrency.
What awaits us after May 12th?
To sum up, the halving is the gradual and predictable process of reducing the release of new Bitcoins, with the ultimate goal of no longer creating new Bitcoins.
Over the years we have seen the competition between miners get fierce and the emergence of ruthless mining pools, large mining companies and mining service providers. The increase in the number of miners has the advantage of making the Bitcoin blockchain and network even more secure and reliable, which encourages the adoption of the currency.
Some traders for these reasons expect great things, such as a six-figure Bitcoin, while others believe that the market, long aware of the halving, has elaborated the event and already priced it in.
Another question for posterity is whether the miners will have enough incentive to continue doing what they do, as the reward continues to shrink. Let’s remember that miners use expensive computers that constantly require high power consumption.
Like a Swiss watch, halving will strike and whatever happens, we will have the opportunity to witness a unique recurrence that can only happen in the crypto world.