The process of mining has been fundamental to bitcoin since its launch in 2009. It is so important, in fact, that it has given birth to a whole new cryptocurrency mining industry, with mining pools, equipment, experts, and different services associated with it.
This means that while there were only a few Bitcoin miners at the start of the cryptocurrency, there are thousands of them at work now. All of them have a collective goal in mind: to process blocks, and earn block rewards in the form of bitcoin.
The block reward was around 50 bitcoin per block at the start, with each block being completed every 10 minutes. Thinking that the more miners there are, the more blocks completed and the more bitcoins would be mined is logical. However, this is not the case.
Having More Miners Doesn’t Mean You Can Get More Mining Rewards
The complex nature of the Bitcoin network denotes that an increase in miners leads to an automatic increase in mining difficulty. This in turn results in regulation in block processing and Bitcoin reward release.
Here’s an excerpt from the famed Bitcoin whitepaper:
“To compensate for increasing hardware speed and varying interest in running nodes over time, the proof-of-work difficulty is determined by a moving average targeting an average number of blocks per hour. If they’re generated too fast, the difficulty increases.”
Since the whole purpose of creating bitcoin was to create a digital currency that could sustain itself over years of use, the process of mining was designed with the same aspect in mind.
The Bitcoin protocol requires an automatic cap on the total number of bitcoins that will ever be released (21 million). The Bitcoin system also sets a number on how many Bitcoins will be released at certain block intervals.
The original value of this was set at 50 bitcoins per block, but the difficult has only increased since then.
At the time of writing in 2019, each block releases around 12.5 bitcoins. The number is only to be reduced with time, with the event taking place every four years.
That event is referred to as bitcoin Halving.
How Does Bitcoin Halving Work?
Bitcoin Halving is implemented as part of the Bitcoin protocol to prevent excessive inflation. The block rewards (bitcoin) provided to miners are decreased every 210,000 blocks by 50%; hence the term “Bitcoin Halving”.
At the current moment, miners process around 5-6 blocks on average on an hourly basis; around 52,000 on a yearly basis; and around 210,000 blocks over a span of four years or so.
After the halving event, their bitcoin rewards would be cut in half.
The next Bitcoin halving event is expected to take place in 2020 where miners will witness their rewards decrease from the current rate of 12.5 bitcoin per mined block to 6.25 bitcoin per mined block.
Why is the Bitcoin Halving Event Important?
From Bitcoin investors to miners, and from traders to lenders; bitcoin halving is important for all parties involved in the Bitcoin ecosystem.
Bitcoin halving regulates the release of new bitcoins. It restricts miners to mine them over the course of a longer time-frame as opposed to mining all bitcoins in the first few years.
Bitcoin halving affects investors, traders, and lenders by showing that bitcoins are released in a more scarce fashion and thus should have more value. This is due to how the rate of supply is decreased while demand stays constant or is increased over time.
This affects the people associated with the Bitcoin ecosystem in a number of ways.
- For investors, the rate of supply of bitcoins is suddenly decreased, which means that the price of bitcoin may also go up.
- For miners, the decrease in block rewards means that they would be expending similar resources but for potentially half the compensation.
- For traders, a lower rate of supply may lead to an increase in the value of the asset.
Simply said, bitcoin halving is important to see how it affects the price of bitcoin, especially this time around. History has shown that bitcoin halving events have led to a delayed run up in the price of bitcoin.
The first bitcoin halving took place in 2012, and bitcoin appreciated in price a year later. The next Bitcoin halving took place in 2016 and Bitcoin investors saw a sharp run up in the price of bitcoin in 2017.
This next bitcoin halving set to take place in 2020 will be an important one to watch as different dynamics may be at play.
Keep an eye on this current halving event and its many potential ripple effects. If history repeats itself, the potential rise in the price of bitcoin may start appearing in the year 2021.
