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Bitcoin Halving: What You Need To Know

Bitcoin Halving occurs on May 11, 2020. To explain what a BTC Halving is we must first explain a bit about how the Bitcoin network operates.

Bitcoin and its blockchain are a collection of computers, or nodes, around the world. These computers or nods have Bitcoin’s code downloaded on them. Each of these computers has all of Bitcoin’s blockchain stored on them. This means that each computer has the entire history of Bitcoin transactions. This ensures that no one can cheat the system as every computer would deny the transaction. Bitcoin is transparent in the way that no one can make a transaction without everybody on the Bitcoin blockchain seeing it happen. 

Even those who do not participate in the network as a node or miner can view the transactions taking place live by looking at block explorers.

Bitcoin Halving Main Points

  • BTC halving occurs on May 11, 2020. 
  • A halving event in Bitcoin is when the reward for a mining Bitcoin transaction is cut into half.
  • The halving event also cuts the inflation rate of Bitcoin in half. And the rate at which new Bitcoins enter into the Bitcoin circulation.
  • The previous two halves were linked to intense boom and bust cycles which ended at higher prices than before the event.

More computers, or nodes, added to the blockchain increase its stability and power. There are currently over 10,000 nodes running Bitcoin’s code. While anyone can participate in Bitcoin’s network as a node, as long as they have enough storage to download the entire blockchain and its history of transactions, not all of them are miners.

What is Bitcoin Halving?

When 210,000 blocks are mined or about every four years, the reward given to Bitcoin miners for processing transactions is cut in half. 

This halves the speed at which the new Bitcoins are released. This is how Bitcoin uses a synthetic form of inflation that halves every four years until all Bitcoins are released and are in circulation.

This system will continue until around 2140. At that point, miners will be rewarded with fees for processing transactions that network users will pay. These fees ensure that miners still have the incentive to mine and keep the network going. The idea is that competition for these fees will cause them to remain low after halvings are finished.

The halving is significant because it marks another step in Bitcoin’s dwindling finite supply. There are only 21,000,000 Bitcoins in existence. There are about 18,361,438 Bitcoins already in circulation, leaving just 2,638,562 Bitcoins left to be released with mining rewards.

Also Read: Blockchain Technology How Does it Work

Reward in 2009

In 2009, the reward for each block in the chain mined was 50 Bitcoins. After the first halving it was 25, then 12.5, and on May 11th, 2020 it is now 6.25 Bitcoins per block. To put this in another context, imagine if the amount of gold mined out of the earth was cut in half every four years. If gold’s value is based on its scarcity, then a “halving” of gold output every four years would theoretically drive its price higher.

These halvings reduce the rate at which new coins are created and thus lower the available supply. This can cause some implications for investors as other assets with low supply, like gold, can have high demand and push prices higher.

In the past, these Bitcoin halving has correlated with massive surges in Bitcoin’s price. The first halving, which occurred in November of 2012, saw an increase from about $11 to nearly $1,150. The second Bitcoin halving occurred in July of 2016. The price at that halving was about $650 and by December 16th, 2017; Bitcoin’s price had soared to nearly $20,000. The price then fell over a year from this peak down to around $3,200, a price nearly 400% higher than its pre-halving price.

Why Bitcoin Halving is Important?

The functionality of the Bitcoin network relies on the coin retaining its monetary value. A distribution schedule with regular halvings is designed to support this by creating a supply squeeze. Each halving also sharply reduces Bitcoin’s inflation rate.

“The inflation rate is essentially equivalent to the inflation rate for gold, which is pretty exciting for those that have advocated for Bitcoin as the “digital gold” based on its inflation rate and scarcity,” Mr. Travers said.

Halving events are important for Bitcoin investors because it is anticipated to have a positive effect on Bitcoin prices, though not necessarily instantly.

Of course, nothing is certain, but the basic principles of supply and demand would justify an associated price rise with curtailed supply, so long as demand stays the same or continues to rise.

Bitcoin Halving History

The first Bitcoin halving occurred in November 2012, when the network reached 210,000 blocks.

The event was preceded by enthusiastic trading and traders around the world hosting halving parties, with prices rallying from under $4 at the start of 2012 to reach $13 by year-end.

The second halving was in July 2016, but anticipation peaked a month before the event, resulting in a sell-off by some investors before the event, and market watchers were more practical in general this time around.

But by early 2017, prices had reached $1,000 then rocketed close to $20,000 by the end of the year.

After sliding back to the mid-$3,000s at the start of 2019, prices have been rallying again in anticipation of the third halving.

The price is currently up more than 30% this month at US$8,865 with market watchers expecting the next halving to add significant value to Bitcoin, in line with the previous events.

Hash Rate Post Bitcoin Halving

One of the most significant drift after halving is the reduction in the hash rate, which experts warned shortly before the event. As miners’ profitability declined due to the half-block reward, the previous generation of mining units, such as the popular Antminer S9, has been largely deactivated. Currently, an Antminer S9 is expected to generate a negative result of over 2 dollars per day. Therefore there is no point in keeping these units online unless miners have access to free electricity.

Due to half the reward and a significant portion of the obsolete miners who logged out, the BTC hash rate dropped significantly by 30% within three days of the half. Although there has been a slight rebound since then, metrics continue to fall by around 25%.

Since the last difficulty setting, a precoded self-regulation mechanism that occurs every block in 2016 and is designed to keep the extraction speed at around 10 minutes per block, allowing Bitcoin to recover only 6% of its hash rate, this drift is expected to continue in the next two weeks.

“We could see some other miners leaving the net for now, despite the beginning of the rainy season in China,” suggested Ian Descoteaux, head of the mines of Bitcoin.com, in a conversation with Cointelegraph, referring to the more dominant region of the sector.

Block time after Bitcoin Halving 

Mining has had several consequences for the sector, including a significant reduction in the block generation speed. The daily metric of BTC block generation fluctuated between 100 and 120 blocks per day after being halved, but dropped to just 95 blocks on May 17, reaching its 2017 lows.

“Miners who disconnected after halving caused a drop in the hash rate, resulting in less frequent blocking meetings every 10 minutes,” said Philip Salter, head of mining operations at Genesis Mining, to Cointelegraph:

“So the block times rose to something like 12min instead of the usual 10min but the capacity for transactions in each block stayed the same. This causes congestion (less space in the blockchain, the same demand for sending tx), and this in turn causes an increase of tx fee. On May 19, the average block time was 14min, which reduces the transaction capacity of Bitcoin.”

This drift played an important role in the huge rate hike, continued Salter, adding: “There should also be greater interest in Bitcoin transactions.”

“I think the high fees are probably due to the growing interest in Bitcoin,” said Chun Wang, co-founder and managing partner of F2Pool, BTC’s largest mining group, during a conversation with Cointelegraph. “It’s not due to half a block reward or a slower block generation.” However, halving may also be one of the main reasons for the growing public interest, Wang added.

Fees after Bitcoin Halving

Raising rates is perhaps the most noteworthy consequence of BTC Halving. Transaction fees raised more than a third of three days after BTC Halving, reaching the $ 5.16 mark due to an 800% monthly increase. The escalation in fees has continued since then, as the current fee for a single BTC transaction is around $ 6.65.

Why these rates increase or exactly what increases the fees rates? Alejandro De La Torre, vice president of the four main mining groups in Poolin, told Cointelegraph that “fees have nothing to do with mining.” There is no correlation between transaction costs and the difficulty of extraction.” Alejandro De La Torre further elaborate

“Rates increase or decrease mainly due to the tariff market created by the entry of limited spaces in a block. If there is a continuous number of transactions on the Bitcoin network, the commissions will remain high. Block space is limited, which creates a rate market. Miners naturally choose transactions with the highest rates, as this will increase the amount of Bitcoin they produce. “

Tariff Rates

According to D’Aria, tariffs are unlikely to increase soon. I expect rates to normalize quickly in the short term, to past levels, and thus the slow increase in average rates in recent years. He explains, saying:

“In the future there’s nothing essential about the Bitcoin Halving that will lead to ever-higher fee rates. All things being equal, the rates would return to their pre-half levels once the average block time normalized to 10 minutes. But of course, it is a multivariate problem and all other things are never the same. “

D’Aria also noted that an increase in the market price tends to be related to an increase in the volume of transactions, which in turn would increase competition for block space. On the other hand, he continued, consistently high commissions will force large-volume owners to reduce those who use external methods such as batch processing and separate cookies.

Mining revenue after halving Bitcoin

Bitcoin miners’ revenues recently peaked in early 2019 for the second time in 2020: the first time was around “black Thursday” in mid-March, the day that Bitcoin prices went down almost fifty percent (50%).

This time, the price of Bitcoin has remained stable. But since the halving mechanism caused Bitcoin miners to generate half the amount of BTC, only 900 coins per day instead of 1,800. The miners’ profits have been reduced. Specifically, miners gained 2,188 BTC on May 10, while that number dropped to 852 BTC on May 12, down 61%. However, there is a kind of silver coating for miners: network congestion has led to a sharp increase in transaction costs, which now account for up to 17% of miners’ income.

Conclusion 

BTC Halving occurred on May 12 2020. Bitcoin (BTC) blockchain halving was the third block halving since the inception of the blockchain network back in 2009. Miners who find the blocks will now get only 6.25 BTC as compared to early 12.5 BTC per block, this is the result of BTC Halving. 

Every four years or when 210,000 blocks have mined the reward given to Bitcoin miners for processing transactions are cut in half. This system will continue until around 2140.

The halving is significant because it marks another step in Bitcoin’s dwindling finite supply. There are only 21,000,000 Bitcoins in existence. There are about 18,361,438 Bitcoins already in circulation, leaving just 2,638,562 Bitcoins left to be released with mining rewards.

In 2009, the reward for each block in the chain mined was 50 Bitcoins. After the first Bitcoin halving it was 25, in the second halving it was 12.5, and on May 11th, 2020 it is now 6.25 Bitcoins per block.

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