The May 2020 Bitcoin (BTC) halving is all over the news in the crypto world. It is being viewed with anticipation across the cryptosphere and many are anticipating a strong bull market in response to it. Despite the anticipation, the average crypto user doesn’t know much about the halving process much. So, here is a detailed insight into the halving process and what kind of overall impact will the process have on the overall network.
The Need for Bitcoin Halving
First of all, what is halving. To answer that one has to go back to the basics of mining cryptocurrencies. Bitcoin is the world’s top cryptocurrency and has a limited overall supply called the hard cap. This hard cap is around 21 million and will not be reached before 2140. New Bitcoins are created by a process called mining in which miners dedicate their computing power and solve cryptographic calculations to get their rewards. Every 15 minutes or so, 12.5 Bitcoin are created as part of the block reward and are divided among the miners based on their resources dedicated to the network. Now this amount wasn’t always constant. Back before July 2016 it was 25 Bitcoin per 15 minutes and in 2012 it was 50 Bitcoin per 15 minutes. The network itself started with 50 BTC per block back in 2009. What causes this decrease in mining rewards?
Bitcoin Halving Simply Explained
The reason is a process called Bitcoin halving. To create systematic scarcity of the Bitcoin asset, founder Satoshi Nakamoto wrote into place a protocol that would allow the block reward to be cut to half every 210,000 blocks. This way, the supply is slowly constricted reverse exponentially that creates scarcity and thus increases value of the currency itself. Bitcoin is fundamentally very different from fiat currencies because new currency can be published and published to no end when it comes to the current fiat systems but with Bitcoin, the supply will rather be constricted and constricted every four years till it is time to stop further creation altogether by the time 2140 arrives.
So, rather than relying on a inflationary model like the fiat currencies, Bitcoin has a deflationary mechanism built into place. But, such a system especially with all of the mining involved can have challenges of its own.
Challenges due to Halving
While it all seems perfect on paper, there are considerable challenges involved for the network and the cryptocurrency itself. For example, the block reward represents a major portion of earning for Bitcoin miners and we are reducing it by half. So, the miners who are already under pressure for keeping up with the tech and using resources effectively might not end up sticking with Bitcoin because the block reward has dropped significantly because of the halving. To keep afloat, there are two main adjustments that will likely be made by the free market:
- Bitcoin’s price index will increase so the even the smaller rewards will be worth taking for the miners
- Transaction fees can be increased by the miners to make their end feasible.
Both of these scenarios may happen simultaneously as well due to the high level of uncertainty in the build up and aftermath of the Bitcoin halving process. Historically, Bitcoin has flip flopped a lot around the halving process and then proceeded to break all-time records in the following year. But, this year in 2020, the anticipation around the buildup is at an all-time high because Bitcoin adoption and trading has reached an all-time high. So, the idea of a Bitcoin halving reducing the supply has had a positive overall effect on the market. Many enthusiasts and influencers have made positive predictions regarding the future of the cryptocurrency because of the halving process. Bitcoin Cash, Bitcoin’s fork is also slated to undergo a halving in the near future and it is also riding high at the moment. Last year with Litecoin’s halving, it was clear that halvings are going to have a considerable impact on the overall value of the cryptocurrency.
But, challenges remain and that is why the bull market is going cautiously. Miners may not be compensated properly after the halving and that may result in a drop in the Bitcoin hash rate which can potentially strengthen other networks and take a slice from Bitcoin’s dominance pie in the crypto charts. At the same time, transaction costs may become too high, rendering considerable issues for users around the world when it comes to transferring money remotely from one place to another like Bitcoin does.
Other challenges to the network itself include
- Clogging of the network because miners may leave the network initially.
- Powerful Bitcoin mining cartels might try to take over the Bitcoin network through a 51% attack (Highly unlikely because if the network is compromised so is everything they have ever mined and all of their physical investment on top of it)
When will the halving Begin?
The halving this time around will begin on 18 May 2020. The process itself will be triggered on the 630,000 block number and the new Bitcoin will be dropped drastically from 12.5 BTC per new block to just 6.25 BTC per new block.
Last halving occurred in July 2016 when the supply was cut from 25 BTC per block to 12.5 BTC per block. Every block is created in around 15 minutes in the Bitcoin network which is based around a consensus-based approach.
It is too early to tell at the moment what will exactly happen around May 18 2020 and the aftermath of the halving process. But, it can be said for sure that in the buildup of the halving process, some significant bull activity can be observed. How far it will go? It is extremely difficult to say!
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