What exactly is the bitcoin halving? There is a limited supply of bitcoins. There will never be more than 21 million bitcoins ever, and this will never change.
Bitcoin is a deflationary store of value with a limited supply, like a digital version of gold, and unlike regular currencies. With normal fiat currency central banks can simply print more money and devalue the currency.
When Satoshi Nakamoto created bitcoin, he needed a way to distribute the bitcoins in a fair way. He decided the best way to do this was to give them away for free, as a reward to people for processing bitcoin transactions, also known as ‘bitcoin miners’.
So by processing the transactions and mathematically securing them into block, the miners are rewarded with new bitcoins for each block created or mined by them. Of course today the cost to mine bitcoins is not free due to the tremendous supply of computing power and electricity needed for the creation of a new block, which happens approximately every 10 minutes on the Bitcoin network.
At first when bitcoin was created by Satoshi Nakamoto, the reward for mining a block was 50 bitcoins. So at first there were 50 new bitcoins created every block or 10 minutes, equating to around 7200 new bitcoins created every day.
The bitcoin halving is the term used to describe the decrease in new bitcoins being created every 10 minutes by half. This halving event occurs every 210000 blocks or approximately every 4 years.
The system was designed so that this reward will be given every block for 210000 blocks, or approximately 4 years, before being cut in half. This is a way to limit and control the supply of new bitcoin on the Bitcoin network. After every 210000 blocks, the reward is again reduced by half.
We had the first halving of the reward on 28th of November 2012, where the reward was reduced by half, from 50 bitcoins reward per block, to 25 bitcoins reward per block. This reduced the supply if new bitcoins being created each day to 3600 bitcoins.
Bitcoin Block Reward Halving Countdown
The second halving event is due to take place in early July 2016 at block 420000 (ETA date of reward drop: 9 July 2016), where the block reward is going to reduce again by half from 25 bitcoins to 12.5 bitcoins per block. This will reduce the daily supply of new bitcoins created to only 1800 bitcoins.
The mining reward or supply of new bitcoins will be cut in half every 210000 blocks, until such time as the reward is down to 0.000001 BTC, and the last of the 21million bitcoins is created. The approximate date for this event is the year 2140.
How does the bitcoin halving affect the bitcoin price?
Nobody knows for sure how the bitcoin halving event will affect the price, but the common consensus is that it will make the price of bitcoin go up. The reason people think this, is because of supply and demand.
Today the price of bitcoin is around $450, and every day 3600 bitcoins are created as a reward for mining blocks. To keep the bitcoin price stable at $450, the bitcoin economy needs to be in equilibrium with supply and demand. This means that bitcoin to the value of $1620000 (3600 x 450) is absorbed daily into the bitcoin network, and to keep the bitcoin price stable, there is a demand for approximately $1500000 bitcoin daily.
The idea a lot of people have, is that if the demand for bitcoin stays exactly the same, but the supply is cut in half, then the price should effectively double over night.
What happened with the price after the first bitcoin halving event?
When we had the first halving on November 28th 2012, we went from 7200 bitcoins being created daily to 3600, and the price of bitcoin on that date was around only $12 per bitcoin.
In the following months after the first halving event the bitcoin price showed massive growth, and led to a rally in price up to $260 in 4 months. At the time the demand for bitcoin at a price of $12 was only $86400 per day to keep the price stable (12 x 7200).
The rally in price was due to the decrease in supply of new bitcoins, combined with speculators and traders pushing the price up.
Source Data: daily values — coindesk.com/price
What do the experts say?
Andreas Antonopoulos author of “Mastering Bitcoin” explains that the impact of the halving event on the price of Bitcoin depends on many factors, he says:
“I can’t predict price. No one can. Anyone who does, even for 10 minutes, is lying.
The reward halving will change the inflation rate in bitcoin. How that affects the overall economy depends on the conditions of all the other parameters in the economy: price, adoption, transaction volume, hash rate, difficulty, investments, other currencies, world market conditions, etc. We’ll see!”
How does the bitcoin halving affect mining profitability?
Bitcoin miners operate on razor thin margins. If you are currently mining bitcoin, it costs you money to run your operation, such costs include electricity, hardware, staff, internet, security etc.
If you are making 10 bitcoins a day mining bitcoin, and reward is cut in half, then overnight your daily mining profits will be cut from 10 to 5 bitcoins a day. This might mean that you are no longer profitable in your mining operation.
If you still have not broken even with your mining hardware and costs by the time of the halving event in July 2016, it could likely mean that you never will.
Many people who are ‘cloud mining’ on websites will find that they will never make back the money they have invested with these websites, most of which are ponzi schemes and scams. (Please read our cloud mining post)
If you are thinking of starting bitcoin mining now, you are probably already too late, unless you know exactly what you are doing, are going to invest millions into a bitcoin mining farm, have access to extremely cheap electricity and resources.