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The claim from many in the community is that once the supply of Bitcoins decreases, Bitcoin’s exchange rate will rise
This past Saturday at around 8pm, the amount of new bitcoin generated every ten minutes was cut in half, marking a new stage for the community of users.
Bitcoin is a digital decentralized currency. Decentralized means that there is no central authority that controls the currency (unlike the US dollar for example that is issued by the Federal Reserve). Since there’s no central authority, rules must be defined for the currency. These rules are known as the Bitcoin protocol.
The bitcoin protocol dictates a number of rules that include things like:
• Every 10 minutes on average a new batch of bitcoins will be issued into the Bitcoin network.
• The amount of bitcoins will be finite with only 21 million Bitcoins allowed in circulation.
New bitcoins are generated by bitcoin miners, the powerful computers that maintain the network. The purpose of these computers is to arrange all of the different Bitcoin transactions into blocks, so that an agreed order of transactions will be maintained.
Hence the name ‘blockchain’, that symbolizes the blocks of transactions connected one after the other. The blockchain contains every Bitcoin transaction ever made since it came to existence in 2009.
Ordering these transactions into one big chain of blocks requires very powerful (and expensive) computers, it also consumes a lot of electricity. Anyone who wishes can become a Bitcoin miner, but it will require a considerable investment that won’t necessarily prove itself as profitable (you can calculate Bitcoin mining profitability through a mining calculator).
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In return for the expensive equipment and electricity the miners use to maintain the network they receive 25 new bitcoins for each new block of transactions that is created. This happens roughly every 10 minutes, and that’s how bitcoins are born.
However the protocol dictates yet another rule. Every 210 thousand blocks that are added to the network, the bitcoin reward given to the miners will be cut in half. Meaning, if up until today that reward was set on 25 Bitcoins, it now decreases to 12.5 bitcoins.
This “historical” event is known as the Block Halving and it’s the cause for many discussions, celebrations and fuss in the bitcoin world. Since a new block is added to the network roughly every 10 minutes, a halving event will happen once every four years on average.
The last Block Halving on November 2012 decreased the miners’ reward from 50 bitcoins to 25 bitcoins. Throughout the internet, websites were put up to count down the time remaining until the next halving.
Block Halving parties are being conducted in 20 cities around the world. A party conducted by the Israeli Bitcoin Association in Tel Aviv supplied actual blocks and allowed the party’s participants to halve them as can be seen in this amusing video below.
The Block Halving is also a source for debate regarding bitcoin’s price. Many claim that once the supply of bitcoins decreases, bitcoin’s exchange rate will rise (it is currently priced at around $660).
Others claim that since this event is known to all and has no element of surprise, the price will not be affected. A few are concerned that since the Block Halving will hurt the miners’ income, some of them may stop mining. As a result the network will lose some of its ability to confirm transactions.
This may scare buyers and cause a drop in the price.
Also Read: Bitcoin gets legal protection in China
It’s important to note that even though the miners’ reward will decrease by 50%, bitcoin’s price has almost doubled since the beginning of 2016 so these seem to even themselves out eventually. When you inspect the behaviour of bitcoin’s price when the last halving occurred four years ago, you can see that there’s indeed as slight increase in value but nothing more.
Also, the price was on a bullish trend even before the halving so you can’t attribute that rise to the halving event alone.
Hopefully, based on past performance, the bitcoin community can feel confident that the boat won’t rock too hard between now and the next halving. See you then.
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