Working of bitcoin & importance of bitcoin halving

Bitcoin Logo on physical gold coin

What is bitcoin?

Bitcoin is a cryptocurrency. It uses blockchain technology for storing and recording all their transactions. The idea of bitcoin was proposed in the form of a white paper. It was published in 2008 online by Satoshi Nakamoto. There are various arguments about the identity of this person. It is believed that Satoshi is not a single person. Creators of bitcoin are jointly called Satoshi. Bitcoin is not controlled by any bank or authority. It is a feature that makes it distinct from paper currencies like the euro or dollar. In the case of bitcoin, every member involved in this chain has the same power. The whole network is decentralized. Bitcoin transactions are transparent. Transactions will be published in the blockchain. But they do not disclose the information about the people who own this digital currency.

Miners will mine Bitcoins using computing power. This computing power makes the bitcoin network more secure. Transactions are processed by giving solutions to mathematical puzzles. These puzzles will be complex, and it will be solved using computing power. Miners will be rewarded with Bitcoins for processing bitcoin transactions in the blockchain. From websites like bitcoin trader, we will get more information about Bitcoin mining. Satoshi had declared that there would be only 21 million Bitcoins. This is for combating inflation. Now, 18.38 million Bitcoins are in use.

In 2009, the first block in the blockchain was recorded. In this transaction, Satoshi acquired 50 Bitcoins. Satoshi had specified in the white paper that rewards would be halved after 210,000 blocks. The first halving was in 2012. After this halving reward for miners, they decreased to twenty-five Bitcoins. Earlier it was 50 Bitcoins. The second halving was in 2016, and the reward was decreased to 12.5 Bitcoins. The third halving was in 2020. Now the reward for miner is 6.25 Bitcoins.

Bitcoin Halving

Satoshi has not explained about the use of bitcoin halving. It is speculated that it is designed for quick distribution of coins at the initial stage. Thus, more people will join the chain, and they will start mining new blocks. It is predicted that the value of bitcoin will be increased with the expansion of the bitcoin network. So, the rewards will also be halved at particular time intervals. The impact of bitcoin halving is that the number of Bitcoins that are mined in a single day will fall to 900 Bitcoins from 1800 Bitcoins. The revenue from mining will be reduced to half. The rate of mining will decrease, and it eventually decreases the supply of Bitcoins. When the supply of Bitcoins tightens, the price of a coin will increase. It was analyzed that halving will lead to bull runs in the market. It was predicted that bitcoin would achieve a 270-percentage growth before the next halving.

Bitcoin halving will lead to a decrease in the inflation rate. Thus, there will be a reduction in the number of new coins. After the previous halving, the price of bitcoin has increased. Halving will occur every four years until 2140. In the year 2140, it will reach a point such that the reward for miners will be the fees that users pay for processing. Thus, the miners will get their incentive, and the chain will be continued. After the halving events are finished, the competition for fees will be tight. The significant aspect of bitcoin halving is that it reduces the supply of Bitcoins. So, the demand will increase, and the price also increases. After the first halving, the price increased to $1,150 from $12. The price of bitcoin at the time of the second halving was $650. After the halving, the price increased to $20,000. So, the impact of halving is that:

  • The reward for miners will be halved.

  • Inflation will be halved.

  • Supply will decrease.

  • Demand will increase.

  • The price will also increase.

  • The incentive of miners will not decrease because the value of the coin will be increased.

The difficulty of mining will be reduced if the value of the coin will not show a hike after halving. Thus, incentives of the miners will still remain.

In the year 2020, the gain from bitcoin is greater than 20%. This year’s halving is different from others because the world is going through an economic crisis due to the coronavirus pandemic. The global economy will shrink by 3%. But bitcoin has the edge over other currencies because it is not under any central authority. Another positive aspect is that the number of Bitcoins mined will be halved this year, and definitely, the price of bitcoin will increase.