Like so many other professional niches, bitcoin comes with a lot of unique jargon and technical terms. It’s high time you learned one of the most important ones: Bitcoin Halving.
Bitcoin has a lexicon that is undoubtedly unique to its business and function. Works like hash, forks, and faucets are just a few of the words you think you have a grip on. Even though it may come as a surprise that you’ll not soon find any of these in your kitchen. With crypto jargon, it’s important to stay on top of trending terms and their associated meanings. Not just so you can easily impress friends and co-workers. But so you’ll actually know what to expect when navigating markets.
This is because many of the terms are closely related to how the price of the functionality of bitcoin behaves. Arguably, one of the hottest terms in crypto right now is “halving”. Not just a fascinating and ultra necessary happenstance in the bitcoin world- but also because the process that the term references is quickly coming to pass. In May this year, we can expect to see a halving, in fact, the third halving. Let’s take a minute to discuss what exactly that means to both users and the market. Not to worry, there are no fractions involved.
Okay… maybe just one fraction. But let’s start from the top. In 2009, Satoshi Nakamoto created a novel system of currency. This system had a finite number of coins (21 million), this number could never be added to, as new coins could never be minted. This meant that the system could never be artificially inflated. Nakamoto also set up a system whereby not all the coins would be released at once, instead gradually and at a predetermined pace.
He also created a distributed ledger system called the blockchain. This system was designed so that any transactions could be verified by the users of the system itself, meaning that it wouldn’t require a centralized power for verification. The users that verified these transactions would be called miners, and as a reward for their good efforts, they would be paid in freshly released bitcoin.
Because of all of this foundational framework, Nakamoto had created a borderless currency that was exempt from the corruption of centralized power structures and was fully capable of creating and storing value, and it’s this principle of value that the halving protects.
What Happens During a Halving
Halving is basically the protocol behind the predetermined schedule on which bitcoin is released. Roughly, once every four years, or specifically- every 210,000 blocks that are mined, the reward amount of freshly released coins that miners are given is reduced by half. This schedule helps to protect the value of bitcoin in two distinct ways:
- The 21 million coin cap ensures that the market can never be artificially inflated
- It keeps miners from releasing all the coins at once and flooding the marketplace with them.
So while the halving does its part to protect the value of bitcoin, it also has some pretty notable effects on the market itself.
Some vocal criticisms of the halving have come up- largely in regards to miner stability. Each time a halving occurs, miners earned half the amount of bitcoin they normally would for solving the computational puzzles. Also- these puzzles get harder. Which means that they have to put in more energy to solve them in a timely manner, and that energy costs money.
In order for the network to run smoothly and quickly, it needs a fair amount of miners. Each mining node that is on the network helps to improve hashrate. Which is literally the computational ability of any given network. More miners = higher hashrate = better performance. So, fewer miners = lower hashrate = slow performance. If a large number of miners decide that it’s no longer cost-effective to mine blocks, it could grind the entire system to a halt.
The other issue that is of real concern is that should enough miners leave, then the overall mining of the network could be left up to a scant few nodes – meaning that cartels could realistically form and use just 51% control of the system to overtake it, leaving bitcoin no longer decentralized.
Historically, halving has positively affected the price of bitcoin, but the pump rarely lasts long, and with each subsequent halving, the price surge has been incrementally less, suggesting that it will eventually even itself out. Which is ideal- helping to stabilize market values and keep supply nearer demand, getting ever closer to economic equilibrium.
Supply and Demand
The economic principle of supply and demand absolutely applies to bitcoin. This principle demonstrates the relationship between these two values. Showing that the price of any given product will vary until the market reaches an equilibrium between the two.
Should supply well overtake demand, the market becomes saturated, and the product becomes near worthless. Conversely, with demand is egregiously high and supply is severely limited, the value of the products will soar- occasionally becoming cost-prohibitive for market expansion.
This is why the halving works as a bit of insurance against all of the coins being mined too quickly and oversaturating the markets.
Transaction Fees vs. Block Rewards
So what happens when all the bitcoins in existence have been mined? Well, it’s a good question that’s been under hot debate. But also something that many of us are likely to see in our lifetimes.
Because the halving cuts the block reward by half roughly every cycle:
- 50 BTC reward, the first cycle
- 25 BTC reward, second cycle
- 5 BTC reward, third cycle (current)
- 25 BTC reward, fourth cycle (May 2020)
- 125 BTC reward, the fifth cycle
- And on and on until the last coin has been mined
The number of coins that are released drops exponentially each cycle. Which puts the estimated fully mined date sometime in the year 2140.
However, bitcoin analysts suggest that by this point, transaction fees will overtake bitcoin rewards, further supply the financial incentive for miners. But transaction fees are supposed to be minimal, right? One of the many bonuses to using the cryptocurrency of fiat.
However, with further adoption of bitcoin, engendering more use cases- miners can expect to start adjusting their fees based on demand and value. Choosing the appropriate reward for the desired throughput. There have also been incidences that when market demand spikes, transactions essentially get placed in a queue- as miners can only verify so many at a time.
When this happens, miners have offered the option for trans actors to pay an increase in transaction fees for priority. Essentially paying to queue jump, which can further serve the financial motivation for miners to continue verifying. By the time 2140 rolls around, it’s fairly reasonable to assume that further adoption and widespread use, with the help of a few soft forks along the way, could see energy demands to lessen and transaction fees to drop. Especially as use becomes ubiquitous and market values stabilize.