The Halving of Bitcoin: Important Things You Need To Know

Bitcoin

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Bitcoin’s central tenets include a controlled money supply and a deflationary economy, which is why the Bitcoin halving is planned.

It is important to know that Bitcoin is built around a limited supply. From the beginning, there were 21 million Bitcoins. Essentially, it’s to counter inflationary economics, specifically unconventional monetary policy, which through quantitative easing (for example, in the United States) or negative interest rates (for example, in Europe) inflates the monetary base through a combination of asset creation and fractional reserve banking.

What is the impact of the halving?

Bitcoins are awarded to the miner each time a block is mined. Bitcoins are generated in this manner. Instead of transaction fees, Bitcoin mining now generates most of its income from block rewards. Online Bitcoin wallets are used to store these Bitcoins safely.

It is estimated that the reward for mining Bitcoin will decrease by 50% every 210,000 blocks or so. Using the Bitcoin algorithm, it is automatically adjusted so that roughly six blocks are discovered every hour (the amount of computational power needed to solve problems to demonstrate proof-of-work and find a block). Therefore, as the limit approaches 21 million mined Bitcoins, the total Bitcoins in circulation will always be slightly under 21 million.

Deflation lowers aggregate demand and consumption, according to standard macroeconomic theory.   Nevertheless, Bitcoin advocates mostly come from the technology community, where the cost of production has dropped dramatically, making entrepreneurship easier. Individual entrepreneurs have been able to start meaningful businesses at scale with Moore’s law and cheap cloud computing resources. This is a battle between two schools of thought, and it’s important to realize that Bitcoin’s argument for deflationary economics and controlled supply rests on halving.

Mining bitcoins will be adversely affected by halving, although most likely have prepared for it

It seems most likely that the immediate economic consequences of the halving will be felt by people who mine bitcoin blocks – the people who control the hash rate needed to discover and protect the Bitcoin blocks. The price per Bitcoin will drop immediately if it does not adjust – as history shows, it takes time for the quantity and price of Bitcoin to equalize. Consequently, previous halving days have seen a drop in hash rate as miners have been discouraged from finding new blocks.

Regardless, the date had been anticipated, and today, in practice, miners are no longer individuals who have spare GPUs, but sophisticated organizations and corporations. As a result of large investments in fixed mining infrastructure in anticipation of the halving date, the corresponding decrease may not be as large as expected.

What is the significance of Bitcoin Halving?

In addition to halving preserving the deflationary aspect of Bitcoin, the community coheres not only technically through nodes and consensus but also ideologically through nodes and consensus.

In order for Bitcoin to remain deflationary, you have to believe that no aggregative force behind the chain could coerce the chain to act otherwise, and that the community at large will live by these principles. Bitcoin’s technically imposed limit of 21 million units is not exact, and it can be manipulated using non-technical means, such as creating a fractional reserve system based on the Bitcoin monetary base. The community’s commitment to deflationary economics currently spelled out in the Bitcoin code is what ultimately ensures that Bitcoin stands out from inflationary economics.

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