What is the Bitcoin Halving and Why is It Important?

An event is about to take place on the Bitcoin network that only happens roughly every four years. The amount of new bitcoin created and earned by miners with each new block of transactions is about to be cut in half. This is part of bitcoin’s predictable, transparent monetary policy, which can be verified in the source code available on the Bitcoin Core GitHub repository.

When these sorts of changes in bitcoin’s inflation rate take place, it's known as a halving event. This upcoming halving is expected to take place this Saturday when block 420,000 is mined.

Why Do Miners Get New Bitcoins?

Before getting into the effects of the bitcoin halving, it’s important to understand some of the basics of bitcoin mining. When someone creates a new Bitcoin transaction, it is sent around to all of the other nodes on the network, including those who are also contributing to the mining process. These transactions are collected and stored locally while the miners are also working on a puzzle of sorts, which requires a lot of computing power to solve. If a miner solves the puzzle before anyone else, they earn the ability to publish the new block of transactions to the public blockchain and collect a reward of 25 bitcoins (soon to be 12.5 bitcoins) plus any transaction fees.

The mining process is the genius of Satoshi Nakamoto’s creation. Miners essentially prove that they have skin in the game by trying to solve the puzzle that goes along with each new block of transactions. The ability to solve that puzzle proves to the rest of the network that the miner spent money on various resources (hardware, electricity, etc.) and has earned the right to mine a block. The miner is willing to spend money on those resources in exchange for the possibility of receiving a block reward.

Essentially, miners can earn a profit by making sure that the cost of the resources that go into computing the solution to the puzzle are less than the bitcoin-denominated rewards they are receiving through the mining process.

What Does the Halving Mean for Bitcoin Miners?

So, with the block reward splitting in half from 25 to 12.5 bitcoins, it seems obvious that some miners will soon be operating at a loss. What happens if a miner is operating at a loss for an extended period of time? In most cases, they turn off their equipment.

Some, such as Coinbase CEO Brian Armstrong, have wondered whether the halving event could lead to a doomsday scenario where a sudden drop in the network hashrate (the amount of computing power on the Bitcoin network) leads to slower transaction confirmations, which then leads to a lowerbitcoin price which then leads to even more miners turning off their equipment, and then the cycle continues.

The vast majority of the bitcoin mining community does not seem worried about the halving event. Bitcoin Magazine recently conducted interviews with many different representatives of the mining community, including Jihan Wu of Bitmain and Valery Vavilov of BitFury, and all of them are optimistic about the halving. Having said that, most of them do believe there will be a minor drop in the overall network hashrate.

It's interesting to note that miners are likely to receive a larger USD-denominated block reward after the halving than they were at the same time last year. Even though the number of bitcoins included in a block reward is about to be cut in half, thebitcoin pricehas more than doubled over the past year.

What Does This Mean for the Bitcoin Price?

Many bitcoin enthusiasts are convinced that the halving will have an immensely positive impact on thebitcoin priceand it's true that thebitcoin pricehas risen quite substantially in the weeks leading up to the drop in the block reward. Whether this increase will continue post-halving is up for debate.

The last halving took place on November 28, 2012, and it did not appear to have much effect on the price -- at least not immediately. Of course, thebitcoin pricewas also below $15 at that point in time, so it was a completely different environment. The price began to skyrocket in mid-January 2013.

It's unclear if the market has already priced in the upcoming halving event. Either way, it will be fascinating to watch how the halving affects both the price and the mining community.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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