Bitcoin: Know about it so you can love it too (Part 2)

Challenge entry: Bitcoin halving and its effect on bitcoin usage

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Hello friends, I'm here with the second part of this short series on bitcoin - "Bitcoin: Know about it so you can love it too". In the first part, I talked about transparency, anonymity, credibility, security and decentralization in Bitcoin and in this second part, I'm going to be talking about a phenomenon in Bitcoin that every one who has heard about bitcoin should know about. It is called "Bitcoin Halving". It will make you love bitcoin the more.

To lay a comprehensive premise for this phenomenon, I'll like to go over an important aspect of bitcoin called bitcoin mining.

^{Bitcoin minning brings new bitcoins into circulation}

_{Disclaimer: It's not this simple. Image credit}

For a scholarly definition, bitcoin mining is the process that's brings new bitcoins into circulation. This definition however, hides a lot of cool stories. So, here's the gist -

Transactions happen all over the world, in the next door shop, when you pay your bills, when you pay your fare, when you make a purchase online or in a brick and mortar store, when you make an online transfer etc. In most cases, these transactions are recorded.

In Bitcoin, whenever bitcoin is transferred, a transaction has occurred. These transactions, immediately the occur are clustered in blocks (you might want to think of a block as a special type of digital folder that houses transaction data). When a block is completed, it is then added to the blockchain (a public database containing all the blocks ever completed). For a block to be completed, all the transactions in it must be verified. The process of clustering transactions in blocks, verifying them and adding the block to the blockchain is called mining. This is done by people called miners.

In this process of mining, very complex computational problems must be solved for a new block to be completed. This involves a lot of electricity and very expensive computing devices. In some cases, labor is also involved. Given that the process of mining is so resource consuming, these miners have to be compensated for the indispensable work they do.

(Bear in mind that these miners by their action of mining, enforce the credibility of the network because the complex computational problems solved are to ensure that no one makes a transaction on the network that is not true).

Now, the compensation given to these miners is called block rewards and it is made up of two things - block subsidy and transaction fees paid on each of the transaction fees in the block.

^{Mining involves heavy resource consumption}

_{So miners are compensated with new bitcoins and fees. Source}

Block subsidy is made up of newly generated coins and it makes up a larger part of the block reward. This is easily understandable given the worth of one bitcoin compared to the little amount payable as transaction fees on the bitcoin network.

So, after each successful mining, block subsidies or newly generated coins are given to the miners. This is how bitcoin is generated or created.

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Now to Bitcoin Halving

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New bitcoins enter circulation as block rewards (block subsidy) when miners who use resource consuming equipments complete the processing and verification of transactions in a block. After every 210,000 blocks or approximately every four years, the amount of bitcoin rewarded for mining each block is... halved. Yes, it reduces by half.

^{After every 210,000 blocks or aprroximately every 4 years, bitcoin rewards are halved}

_{This has an effect on the usage of bitcoin. Source}

Originally, each block mined accrues 50 bitcoins but that has been halved thrice since the inception of bitcoin and it now stands at 6.25. The most recent halving occurred on May 11, 2020, bringing the rewards to 6.25BTC per block mined. This phenomenon reduces the amount of bitcoin in circulation and that has a effect on the usage of bitcoin. It is projected that this halving will continue until the year 2140 when it will eventually reach 0BTC per block mined.

^{Table showing the halving of bitcoin}

_Source

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Now let's talk about the effects

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Halving reduces the number of bitcoin added in circulation after every block is mined or after approximately every 10mins. According to Michael Dubrovsky, co-founder of mining R&D nonprofit PoWx,

“The theory is that there will be less bitcoin available to buy if miners have less to sell.”_Source

The effect,

^{A logarithim chart of XBT price in USD after the first two halvings}

_{The price of bitcoin has always increased after each halving. Source}

From the chart above, it can be seen that the price has always risen after each of the first two halving. However, there's been a little argument that the scheduling of the halving being known will jeopardize that trend. If miners can calculate when this will happen, they can be prepared for it. Also, if the public know when the halving is going to happen, they can buy bitcoins to store waiting for that increase in price and this will lead to an increase in price before the halving and not after, at some point.

That notwithstanding, the halving of bitcoins given as rewards reduces the number of bitcoins entering circulation and as the demand remains the same, the price of bitcoin goes up.

This has been evident from the aftermath of the latest halve that occurred in May this year. The price of bitcoin has risen recently, crossing $13,500 about five months after the halving. Make of it what you want, but from details of past halving activities, you can expect the price to go higher after the next halving if nothing changes. I would also consider anticipating an earlier rise in the price as more people might want to try purchase and wait for the increase in price. It might be a win for whoever buys earlier.

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Conclusion

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Approximately every four years or after every 210,000 blocks are mined, the amount of bitcoin issued in block rewards is reduces by half. From the past halvings, the price of bitcoin has been noticed to rise after each halving. It is imperative to note that no halving is exactly the same with the other as circumstances surround the periods may be slightly different. Notwithstanding, the rise in price of bitcoin has always been noticed even with the effect of COVID-19. Thus, there's a kind of sure bet when using bitcoins - it will most probably rise after the next halving. Having this in mind, a trader can make some very profitable investment decision.

This phenomenon called bitcoin halving which creates a kind of sure increase in the price of bitcoin at a calculable period, is one of the reasons why I love bitcoin.

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References:

1. Coindesk.com
2. Swissquote.com

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The price of Bitcoin (BTC) will be 13650.00 USD

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