Jan 15 / 2020

Back to Bitcoin basics as the inevitable halving looms

Can bitcoin halving effect the bitcoin market? Less than 120 days to find out!

In a nutshell

Bitcoin is the world’s largest cryptocurrency which aims to facilitate online payments for people from all walks of life, irrespective of their country of origin. Each bitcoin is a digital form of cash that is stored in a ‘digital wallet’ application on a smartphone, computer or cryptocurrency hardware wallet. Owners of bitcoins are anonymous and the only connection between a buyer and a seller is through encryption keys. No social security numbers, names, government, banks or other institutions are in control. In fact, Bitcoin transactions are processed and secured in the network by miners solving computational problems that allow them to chain together blocks of transactions. Every transaction is then recorded in a public list called the blockchain.

Understanding Bitcoin mining

Bitcoin mining is the backbone of the Bitcoin network. Mining doesn’t come easy and if it did, it wouldn’t be paid for. Bitcoin mining is a computer process for new bitcoins to be mined and distributed within the digital economy. The idea aims to reward people with new bitcoins for securing transactions through computational work. In fact, new bitcoin is created as a reward for miners verifying blocks in the blockchain.

Bitcoin mining is, therefore, the process of adding transaction records to Bitcoin’s public ledger of past transactions or blockchain. This ledger of past transactions is called the blockchain as it is a chain of blocks. The blockchain serves to confirm transactions to the rest of the network as having taken place.

In February of 2019, there were a little over 17.5 million bitcoins in circulation. Aside from the coins mined via the genesis block (the very first block), every single one of those bitcoin came into being because of miners.

Bitcoin & gold inflation similarities

Bitcoin was designed to mimic gold’s stable inflation rate.

Bitcoin was designed to mimic gold’s stable inflation rate. As such it’s considered a deflationary currency or asset. Its inflation rate is predictable and constantly decreasing. Since Bitcoin’s total supply is fixed at 21 million BTC, Bitcoin’s purchasing power is expected to continue to grow over time as demand continues to increase.

Clearly, the number one digital currency was designed to be valuable. In fact, inflation in the Bitcoin economy is controlled over time as the distribution mechanism slows down through the process of halving. When Bitcoin mining started, the reward was set to 50 coins per block but ‘Satoshi Nakamoto’ the entity behind Bitcoin, put into the protocol a rule where every 210,000 blocks, meaning roughly every four years, the reward would be cut in half.  Therefore today this is known as a ‘halving event.’

The halving event

The first block reward started out at 50 BTC. This was halved in 2012 and again in 2016. The current block reward for miners is therefore 12.5 BTC. In May, the reward will go down to 6.25 BTC, and then half again in another four years’ time, give or take a few months. 

Given the close proximity of the next halving, industry thought-leaders have recently shared their thoughts on this major bitcoin event. In this vein, Chief editor of learnbonds.com Edith Muthoni comments on this halving event as an event that will decrease the motivation of miners. She asks: “if miners will no longer receive block rewards (or too little), will they continue mining? What will be their motivation to stay on? What does this mean for the network and Bitcoin?” 

Co-founder and CEO of RockX, Alex Lam.

Co-founder and CEO of the RockX digital asset services platform Alex Lam is one of China’s most prolific miners and one of the first to use ASIC miners. Lam previously founded RockMiner, one of the most influential cryptocurrency mining companies in the world. He also comments on the mining effect and states that “The next Bitcoin halving is likely to result in mining profitability decreasing significantly in the short-term.”

Jeffrey Barroga, digital marketing officer at peer-to-peer Bitcoin marketplace Paxful adds to this and says “Mining is already competitive and resource-extensive as it is and when you combine that with the impending block reward reduction in May, hobbyist miners and small players might find that whatever BTC they gain is insufficient to pay for the overhead costs of running their rigs. However, expect more miners and fiercer competition if the value of Bitcoin reaches $20,000 again.”

Most would assume that the Bitcoin halving will negatively affect the Bitcoin market but Steve Tosu Global CEO of the RRMine Bitcoin cloud mining platform makes us query this: “The halving in 2020 will have great impacts on Bitcoin miners: 1) Miners with low mining efficiency will be forced to pause and re-evaluate their business operations. 2) Digital mining is becoming the racetrack for giant international companies because they have more advanced machines and cheaper sources of electricity.”

Will miners’ profitability decrease?

While the general consensus is that the Bitcoin halving will reduce miners’ profitability (at least for the short-term), there is still a possibility that this won’t happen. But that all depends on the price of BTC at the time of halving. If there’s no significant increase, Bitcoin mining may no longer be sustainable unless you’re a major mining centre.

When the last bitcoin is mined..

In actuality, the final bitcoin is unlikely to be mined until around the year 2140, unless the Bitcoin network protocol is changed in between now and then. But when this happens does it mean Bitcoin dies? No, the compensation system will transition into transaction fees. The programmed network includes a protocol that will provide transaction fees as another incentive for miners. 

Although some might think that these transactions alone aren’t enough to sustain the network Lam thinks otherwise. He says “Yes, in the long run, the Bitcoin network will still be sustainable. This is because transaction fees will be higher in each block as mining gets increasingly sensitive in the coming Bitcoin halving. Users will also have to pay enough to miners to ensure they don’t shut down, which would make the whole network less secure.”

Alex Lam concludes that “the increase in BTC prices in the long-term will ensure that mining is still profitable. As such, investors should view Bitcoin mining as a long-term investment, instead of a vehicle for short-term gains.”

Future Predictions from past performance?

Bitcoin has had two halving events since its inception. Each time it happens no one is entirely sure how the price of Bitcoin or the broader cryptocurrency market will react. That said, Bitcoin halving has exhibited an extremely positive event for price action each time it occurred in the past.

Indeed, the price of bitcoin has spiked after both of the previous halving events. While past performance is not indicative of future results, it’s interesting to pay close attention to the digital currency as it creeps ever-closer to the big day. The clock is ticking and the game is on!

 

About AIBC Summit:

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Join us at the first edition of Manila AIBC Summit, the future tech event of the year, set to take place on the 08-09 June 2020.

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