Reward Halving

The last time a Bitcoin Block reward halving happened was on November 28, 2012 (from 50 to 25 bitcoins per block). And that was also the first ever in the life of the cryptocurrency.

By then, many people didn’t know bitcoin, over $1 billion hadn’t been invested in Bitcoin startups and the average daily transactions on the bitcoin network was about 45,000 (contrasted with over 250,000 today).

Indeed, a lot has changed since then.

July 11th, 2016 presents the next Bitcoin block reward halving. From that date onwards, miners will receive 12.5 instead of 25 bitcoins for every block that they help confirm on the blockchain.

With the past four years’ growth, the impact of this halving will reverberate way more than the 2012’s.

In this post, we will answer several questions about this event.

What is a bitcoin block reward?

Bitcoin is a peer-to-peer payment method. There is no trusted third party to facilitate the transactions. Nevertheless, there is the need for infrastructure (hardware and software).

Moreover, someone needs to ensure that only genuine transactions are included on the bitcoin’s distributed public ledger (the blockchain).

This is what Bitcoin miners do. They provide the infrastructure as well as secure and confirm transactions on the blockchain.

These private and independent individuals are spread all over the globe. But the network they form effectively establishes consensus on the status of the blockchain.

For their effort, the miners are rewarded with the new bitcoins. Satoshi Nakamoto, the inventor of Bitcoin, designed the protocol such that a miner who wins in the competition to solve the mathematical problem that secures the next block of transactions takes the new bitcoins.

The bitcoin block reward is, therefore, the bitcoins that a miner gets for helping secure the next block of transactions on the blockchain.

The award is fixed for a batch of 210,000 blocks, which take about four years to add to the blockchain. After that, it halves.

Why is Bitcoin block reward halving?

Bitcoin is a deflationary currency. Its supply is fixed (or was fixed from the word go). The total amount of Bitcoin units that will ever be in circulation is capped at 21 million.

The last bitcoin is expected to be mined sometime in May 2140.

This is different from fiat currency. There is no total amount of the dollar, Euro or Yen units that will ever be printed. The volumes in supply are at discretionary of the central bank (the Federal Reserve in the US).

By not pre-mining all bitcoins, Satoshi Nakamoto ensured that a gradual release of new units will act as a motivation for those who support the network.

What happens to miners after the year 2140?

At the moment block reward is the primary source of revenue for miners. Obviously, with it halving after every four years, this is not going to be the case for long. In the next few years, the reward per block will have significantly shrunk.

With that, it may seem like the motivation to maintain the Bitcoin network will disappear. And with that the cryptocurrency will die.

Good news is there is a source to replace the mining reward. And that is transaction fees. With time, users will be required to attach fees to each transaction they send out for it to be included on the blockchain.

Indeed, this is already happening. It is voluntary at this stage, and it is only supposed to hasten the process of confirming a transaction. At the moment, those who attach transaction fees and those who don’t, all, in the end, do get their transactions confirmed by the network.

But with little or no mining reward in future, the transaction fee will become mandatory. That is because it will be the only source of revenue for miners.

Wouldn’t that make bitcoin as costly as other methods of payment?

The hope is that bitcoin will forever remain far cheaper option than the centralized payment methods like PayPal and credit cards.

That is supposed to be the case even when miners will rely solely on transaction fees as their primary revenue source.

Each passing day, people around the world are discovering Bitcoin. This means the volume of transactions on the Bitcoin network will keep growing.

With the economy of large scale, individual transactions can be charged low. But, at the same time, miners can collect sustainable revenue from the high number of transactions they confirm.

Even more, Bitcoin offers other benefits aside from low cost. It is more private, faster and secure than the other payment methods. These benefits might make paying extra in transaction fees acceptable to users.

How will the halving impact the bitcoin price?

Bitcoin is digital gold. It is an asset just like physical gold for all intents and purpose. That makes the law of supply and demand apply to it too.

With the reduction in the supply of new bitcoins by 50%, it is expected that the price of the cryptocurrency will respond by going up. What might not be clear, however, are the exact margins by which it will surge.

With that being said, it is important to have it back in our minds that there are other factors that might come into play. These factors might force the bitcoin price to go further up, remain at the same level or even go down.

For instance, the reduction in the block reward might make some miners exit the Bitcoin network. This could result in a bad user experience like delayed confirmation, which in turn, could make some users to seek out and thus drive the price down.

There is also the likelihood that the expectation that the price will shoot up after the halving could be making many over-buy before it actually happens. This might drive the price down after it happens because everyone then will be seeking to sell.

All in all, everything points to the Bitcoin price going up, somehow, as an effect of the Bitcoin block reward halving.

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