What Is The Bitcoin Halving?
Bitcoins are generated by a process called “mining,” which we’ll cover a little later, but for now, all you need to know is that miners process transactions and secure bitcoin’s network by solving a complicated computational (math) problem. In exchange for this work, they get rewarded with new bitcoins.
When bitcoin first came out, people were able to mine 50 bitcoins every 10 minutes. Then, in the first halving of 2012, 25 bitcoins were issued every 10 minutes. In 2016, it was 12.5 bitcoins. On May 11, it was halved again to 6.25 bitcoins every 10 minutes. This will go on until the year 2140 when all 21 million bitcoins are mined. The idea is that as time goes on, it will get harder and harder for miners to produce and be rewarded with bitcoins.
Why would we ever cut someone’s reward in half? How can this be a good thing? I hear you – all valid questions which we’ll go over in this blog post. But first, a quick lesson on basic economics. Only then will the tale of bitcoin’s halving make sense.
And it all starts with… avocados.
More Money Means Less Avocados
In our not-so-hypothetical world, the government has printed a lot of money and is pouring it back into the economy, which means you have more cash to spend. YES, send all that surplus my way. Let’s assume the price of an avocado is $2. With your typical salary, you can afford 1 avocado at that price. But thanks to the government printing more money, you have more cash to spend. This means you now have $4 so, naturally, you buy 2 avocados instead of 1.
Since everyone can also afford to buy more avocados, the grocery store increases the price of avocados to $3. Well, with your $4 you can now only afford to buy 1 avocado. What just happened? Well…your money has just lost buying power because now you need to spend more money to buy the same amount of goods.
Should this trend continue, inflation would occur because inflation is a sustained increase in the price of goods over time. The worst part about inflation is that it can sometimes completely collapse an entire country’s economy, making their population so impoverished they can barely afford to survive (Venezuela is an example of this but more on this later). This is why creating a lot of money is not a good thing.
Bitcoin Was Created To Protect Our Wealth
So having too much of something makes it lose its value. While banks have the power to create more money by simply turning on the printing machine, it doesn’t mean that they should. As we have seen with our avocados, by tinkering with the money supply, banks and governments can devalue the currency and make their populations poorer. So remember this: wealth cannot be generated by tampering with the money supply. The problem of money creation is what bitcoin (a form of digital cash) set out to solve. When bitcoin was created in 2009 by Satoshi Nakamoto, he designed a way for new bitcoin to be distributed without a person or group of people deciding who should get them or how much of it should be created. He understood that allowing one entity to control the money can only lead to them increasing their control of everyone’s life and everyone’s wealth – oops, my bad – lack of wealth.
What Is Bitcoin Halving?
Ok, but how do money, avocados, and bitcoin relate to each other? 1) Bitcoin is a way of battling inflation created by banks and governments – a price you and I pay for, not the banks. And 2) avocados are tasty. We know from the start of this blog post that Bitcoins are generated by a process called “mining.” Like gold miners that need to dig out gold to bring it to the market, bitcoin miners bring bitcoin into the market through a similar process called “bitcoin mining.”
Except that instead of people physically digging out gold from the earth’s surface, bitcoin miners are solving super complex algorithms that go WAY over my head. Over everybody’s head. This is why powerful computers are needed to do this.
The Role of Bitcoin Miners
What problems could be so hard to solve that miners need super-powerful computers? Well, they need to process all bitcoin transactions that are happening around the world in a given time, verify they are correct, and store them in a virtual place called the “block.” Then these blocks get chained up to each other to create a chain of blocks, called the blockchain. Original, right? The first to solve the computational (math problem) gets rewarded with bitcoin. And this reward is what expands the supply of bitcoin in the market because there’s now more Bitcoin in the network.
When bitcoin first started, a miner would get 50 bitcoin per block they created. If we assume bitcoin miners still get 50 bitcoin today as a reward, AND 1 bitcoin is worth $8,700 (because that’s the price at my time of writing), then a bitcoin miner would make $435,000 when they’ve successfully mined a block. THAT IS A TON OF MONEY.
But Nakamoto in his wisdom put in a rule where every 210,000 blocks (about every 4 years) the reward is reduced by 50% – the “halving.” This halving will go on until the year 2140 when all 21 million bitcoins will have been mined.
Why Do We Need To Halve The Amount Of Bitcoin?
Why not keep the reward the same? Isn’t that unfair to the miners who work so hard? Kind of.
The answer again lies in supply and demand and ties back to the example of our avocados. If coins are created too quickly and there’s no end to bitcoins created, eventually there will be SO MANY bitcoin in circulation that they would have very little value. And inflation may ensue.
Bitcoin was designed to be valuable in that there will only ever be a specific number of them in existence (21 million) and that inflation in bitcoin’s economy is kept in check by slowing its creation, cutting its supply, and distribution through the process of halving. In other words, halving is a feature that gives bitcoin its value and makes it a sustainable currency and a safe place to store wealth in the long term.