The Bitcoin halving: Separating fact from fiction

The Bitcoin halving is now less than a week away. In normal circumstances, this would see the crypto community gather in bars, parks, and Tiki lounges across the land to revel with fellow Bitcoin enthusiasts. They would toast this incredible feature of Bitcoin and hug one another as they praise its ingenuity. But this is 2020, baby! So Zoom calls and Reddit forums it is. Get your party hats and webcams at the ready.

Regardless of what’s going on though, the Bitcoin halving still has the ability to conjure the excitement it always has. There’s still a lot of buzz – Google searches for the halving are going parabolic and crypto Twitter hasn’t stopped talking about it for months. However, the internet is a playground and much of the information out there is not always as accurate as you might hope.

We’ve tracked down some of the most common misconceptions around the halving and separated fact from fiction. Make sure to show off your knowledge at your own Bitcoin Zoom party. Then send us the pictures on Twitter. It’ll be fun.

Will I have half the amount of Bitcoin after the halving? Nope.

Don’t worry – The Bitcoin halving will not impact the amount of Bitcoin you hold. No one is going to magically delete half of your Bitcoin, you’re not going to be forced to give any back, and DO NOT, REPEAT DO NOT give it to some guy you meet in a chat room who says you have to give them half your Bitcoin because it’s halving day.

The Bitcoin halving is a recurring event in which the number of Bitcoins awarded to miners is cut by half. Where fiat currencies such as the US Dollar are issued by central banks, there is no central body ‘issuing’ Bitcoin. Instead, it’s written into the Bitcoin protocol that new Bitcoin be ‘issued’ as a reward to miners for validating a ‘block’.

When Bitcoin was first released in 2009, this reward was 50 BTC per block. Halvings are programmed to take place every 210,000 blocks that have been mined, which takes roughly four years. In 2012, it was reduced to 25 BTC per block. In 2016, it was reduced to 12.5 BTC per block. This year’s halving will see the block rewards fall from 12.5 to 6.25 Bitcoin. The fourth halving is expected in 2024 when the rewards will fall to 3.125 new BTC, and on it goes.

Will the halving cause the supply of Bitcoin to fall? Not entirely.

You’ll see a lot of people say the halving means the supply of Bitcoin will fall. This is inaccurate. The supply of Bitcoin will not fall after the halving – the supply of new Bitcoin will fall after the halving.

The supply of Bitcoin is always increasing and will do so until it reaches the total number that can ever be created (21 million Bitcoins, as written into Bitcoin’s protocol). This will happen sometime around 2140. However, as explained, Bitcoin is created when it is granted to miners as a reward for verifying new blocks in the Bitcoin blockchain. When these rewards are halved, this means fewer Bitcoins are being created every minute. In other words, the supply is still increasing, it’s simply doing so at a slower rate.

The halving is simply a mechanism to control inflation. Let’s say Satoshi had launched the Bitcoin network with the full 21 million supply ready to go. There would be little incentive for its value to rise, as supply would likely outweigh demand. To encourage sustainable growth, Satoshi chose a logarithmic scale on which to set dates for the halvings. This means that even though 80% of Bitcoin supply has already been mined in its first 10 years, the final Bitcoin won’t be released until 2140. We still have over a century of guaranteed incentive for miners to participate in the network, and for the market to figure out just how much Bitcoin is worth.

It is unlikely that anyone saying the supply of Bitcoin will fall after the halving is doing so maliciously, though. They’re probably just being a bit lazy in their terminology. However, it’s important to understand that the halving decreases the supply of new Bitcoin because this will also affect your understanding of how it impacts the price of Bitcoin, around which there are also many big claims…

Will Bitcoin price halve/double/quadruple immediately? No one knows

Historically, the halving has been credited for some significant movements in the Bitcoin price. However, the idea that the price of Bitcoin is guaranteed to magically halve, double, or quadruple overnight is false.

The principles of supply and demand do hold true to an extent, but as we’ve explained, supply is not actually falling and demand is not necessarily going to increase. If we accept that previous halvings did lead to major price movements, these major price movements often occurred some months after the event had actually taken place and not immediately after, even if there was a small bump. This is likely partly because of the decrease in the supply of new Bitcoins, and partly because of the increase in demand from the hype that surrounds it and those who perceive the ingenuity of the halving.

But there is a complex tapestry of factors at play. For example, there is likely to be a big impact on the price from the increased computing costs that miners must bear in order to deal with the increased mining difficulty and make a profit.

Ultimately though, while these factors may have driven up the price of Bitcoin in the past, there are no guarantees they will this time around. It’s a more mature market now and the world is a very different place as opposed to four years ago, so it’s harder to say old rules apply. There’s more hype and publicity around the halving, which could send demand soaring immediately, and gains could be at least 5000x the size of the previous halving. Equally, there is a lot more institutional money and more financial instruments at play, which may mean the halving is more priced in than previous years and there could be zero movement. We’ll have to wait and see.

Will the halving destroy miners? Almost certainly not.

This was probably the biggest fear people had ahead of the first halving. But guess what? The Bitcoin network is still here and it’s still thriving. The smaller miners might struggle and sadly go under, but mining rigs have evolved at an exponential rate over the years in order to increase profitability. Moreover, as mentioned, the halving is a known event and any miner with any sense will have already put in place the technology and processes to accommodate for it. The miners will continue. Bitcoin will continue. To the moon!

Keep reading…

Top crypto trends to watch out for in 2020

Bitcoin Halving (Halvening): Everything you need to know

Bitcoin halvings through history