THE HALVENING & POST 21 MILLION MINED BITCOINS – Ahmed Marjeby
Cryptocurrencies can be a bit complicated for the best of techies and there are some concepts like “Bitcoin Halvening” which actually needs careful study and analysis. While Bitcoin halvening is not at all a new concept (already been executed twice, in 2012 and 2016), it needs some introduction. The concept of halvening is to reduce the bitcoin inflation algorithmically by 50%. Why?
Read the context from Satoshi’s email itself:
The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase.
The halvening is Bitcoin’s deflationary monetary policy that is executed after every 210,000 blocks, or roughly every 4 years. In Bitcoin halvening, the total generated Bitcoin rewards per block are divided by 2, and by the next halvening, it will be reduced to 6.25 BTC from 12.5 BTC. This shall be carried on till the total supply reaches 21 million. As previously mentioned, the first two-halvening events took place in the 2012 and 2016. And the next one is due in May 2020. Just round the corner, isn’t it? Before going further, let us grab some more information about Bitcoin mining and it’s rewards.
Mining
Owning Bitcoin (BTC)s can be done in two ways, either one can buy the cryptocurrency or you can mine the Bitcoin (BTC)s.
What is mining?
Mining is the only way to produce new cryptocurrency in circulation. Only the amount of Bitcoin (BTC)s mined will be in circulation. Although the Bitcoin currency shall still exist in the absence of the miners, the volume will not increase. Thus, mining forms a crucial part and this mining shall continue until the target number of Bitcoin (BTC)s of 21 million is met.
The Bitcoin mining process involves two steps. At first, the miner has to get a transaction verified. At the second step, to add a block of transaction in the blockchain, the miner has to compute a complex math problem. This is called “proof of work”. The difficulty levels for a block depends upon the number of miner competing for the solution — more the number of miners competing, more complex the problem gets, and vice versa. The Bitcoin mining generates the cryptocurrency in circulation.
Rewards
The reward for completing one block or mining one block is 12.5 Bitcoin (BTC)s. Thus, in June 2019, when one Bitcoin is valued at US$ 7,934.54, a miner would receive US$ 99,181.75 (12.5 x US$ 7,934.54). Initially in 2009, when the Bitcoin was mined for the first time, the miner was rewarded with 50 BTC for mining one block. This was halved to 25 BTC in 2012 and again halved to 12.5 BTC in 2016.
The next Bitcoin halvening is expected to be in May 2020, which is next year. The halvening is executed at when the count reaches 210,000 blocks, which is approximately every 4 years. In the past two events of halvening, the price of the Bitcoin increased dramatically. The prices surged to US$1,000 after the 1st halvening and US$19,000 after the second one in 2016.
As the mining reward depletes, you would expect the miners to leave mining (especially miners using older processors). But the halvening turns out to be usually a non-event because either the hash rate balances itself or even better, the Bitcoin has a price spurt which makes it more than worthwhile for miners to keep mining. The 21 Million bitcoins are expected to be mined by 2140 so we are more than a century away from miners having no incentive to mine blocks.
But what will happen after all the Bitcoin (BTC)s have been mined?
Even if the block reward is gone, the miner is paid a small transaction fee. By the 22nd century, it is expected that the mining equipment would be so energy efficient that the low fees will also be sustainable for the miners. Another set of analysts believes that transaction fees will rise to ensure parity for miners. Whatever the case, the Bitcoin network will keep on running and validators suitably rewarded. They might not be able to generate massive returns of the 2010–2020 period but the crypto mining industry would have converted into a utility long before then.
The 21 million blocks limit is a critical feature of Bitcoin. This ensures that there is a controlled increase in number of Bitcoin (BTC)s in the market and there is no chance of Bitcoin “printing” similar to the money printing by Central Banks which is devaluing all our cash holdings.
Satoshi has created a self-sustaining financial model where all stakeholders are in sync and incentivized to ensure that the Bitcoin framework remains robust. That is why, even though Satoshi has no control over his invention, Bitcoin is growing in strength everyday.
Published at Tue, 01 Oct 2019 03:41:29 +0000
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