Diminishing Returns: How The Halving Process Affects Bitcoin

The concept of bitcoins was first developed by Satoshi Nakamoto in 2009. In doing so, he also came up with rules that would govern the production of bitcoins in the coming years.

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The Mining Process

This is the process by which the manufacturing of bitcoins takes place. ‘Miners’ is the term used to refer to the individuals who play this crucial role. Their transactions usually come out in the form of blocks, after a long and vigorous process. These blocks are the results of complex mathematical calculations. Once done, the record keeping takes place in the blockchain. This blockchain is, in a way, a digital public ledger.

Why Should Halving be Done?

The main question that will arise in everyone’s head when they realise that halving will put BTC miners to a loss, is why should it be done in the first place. The simple reason for halving is to be in charge of inflation. With this effort, bitcoin intends to imitate a commodity such as gold. Gold is available in a limited amount in this world (unlike fiat currencies which are controlled by central banks and are produced by the banks in crazy amounts, so their value drops quickly). The value of gold has been maintained because there is only a limited supply of gold. Bitcoin wants to follow the footsteps of gold by halving.

However, in the actual code of Bitcoin halving, there is not a “constant” value of the new coin. However, there are rules regarding how many bitcoins are to be released and how and when the supply will be reduced, so then there will be a time when no new bitcoins will be released.

How the halving process takes place

When Satoshi launched bitcoins, the reward for every block would be no more than 50 bitcoins. This amount of reward would remain for the next 4 years. After every four years, the number of bitcoin rewards would reduce by 50%, or rather by half. This process was set to be automatic and, as such, safe from any external influence or pressure. As a result of this programming, the reward reduced to 25 bitcoins in 2012. The 2012 occurrence is known as the first having.

4 years down the line we are in 2016, and the second halving will be take place in late July. In so doing, the halving will reduce the reward to 12.5 bitcoins. Again, this process will repeat itself every other four years. According to Satoshi, mining will culminate with the production of 21 million bitcoins. At this point, there will be no more rewards or halving. Furthermore, it’s helpful to know that “btc” is the initial form for bitcoins, hence from 50btc to 25btc and now to 12.5btc.

Other terms for halving

There are other terms used by programmers to describe the dividing of mining rewards by two. Such terms include 'reward halving', 'bitcoin halving' or 'the halving'. It is is also common to find other bitcoiners refer to the process as 'bitcoin mining reward halving'. Other synonyms or phrases may also appear over time.

Effects of halving

The father of cryptocurrencies came up with the halving concept for a good reason. Even so, there are two sides to every coin and we will take a brief look at each side.

a) To Regulate Production

Block HalvingIn every form of business, demand and supply are key factors. The two affect each other from time to time, and stability is only achieved when they are at equilibrium. Satoshi Nakamoto foresaw that without a control mechanism, the production would lose meaning. This regulation was not intended to curb supply. As a matter of fact, the ultimate 21 million BTC figure will circulate in smaller denominations dubbed 'satoshis'.

b) Operational Costs versus Revenue

A lot of CPU time and high voltage electricity is the price paid by miners in their bid to mine bitcoins. This is not inclusive of the high costs of acquiring mining machines. These machines continue to use the same amount of electricity throughout. This means their operational costs remain constant, while the reward reduces by half. In the end, the revenue for miners will continue to drop a great deal over time. Inevitably, this will cripple down their business.

c) The good news!

Every halving is also its own success story. It means there is more mining, motivated by an increased market use of the currency. With this, the value of 1 BTC will remain stable and most likely go up again.

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