2020’s Bitcoin halving occurred on the 11th of May, but it wasn’t the first halving. Bitcoin halving cuts Bitcoin’s inflation rate in half, but the halving is designed to raise Bitcoin’s value.
This rise makes it a more desirable store of value. Keep reading to understand how Bitcoin and halving work.
How Does Bitcoin Work?
Bitcoin is a cryptocurrency with a finite supply (21,000,000 bitcoins as per the most recent numbers). If your vendor accepts Bitcoin, then it functions like any other currency you use to transact.
Whenever you use bitcoins to make a purchase, the transaction’s information is added to a block. However, before the block is added to the blockchain, the transaction’s details have to be verified.
The verification process involves using computers to solve equations. In return for the labor of verifying transactions, people receive bitcoins. Though, this isn’t a regular currency reward. Since bitcoins are easily divisible, these transaction processors receive part of a bitcoin. Generally, the faster the computer, the greater the reward. This process is known as mining.
What is the Bitcoin Halving?
For every 210,000 blocks mined, the reward for mining is cut in half. For example, if you earned a bitcoin for mining ‘X’ blocks, you’ll earn half a bitcoin for mining ‘X’ blocks after the halving.
The result of the halving is to increase the value of a bitcoin. The causal chain goes as follows:
- Cutting the reward for mining by half halves Bitcoin’s inflation rate. Inflation is a function of the amount of money in circulation and how quickly it circulates (how often it’s spent). By reducing the rate at which bitcoins enter circulation, the halving cuts Bitcoin’s inflation rate in half.
- Since the growth of Bitcoin’s supply slows down, demand will outstrip supply and raise its price. However, it should be noted that this step assumes that the demand for Bitcoin will grow faster than Bitcoin’s supply. If this assumption isn’t sound, Bitcoin’s value may fall.
- The growth in Bitcoin’s value balances the disincentive generated by the reduced reward for mining. Even though the reward for mining is halved, the value of what you get following the mining has increased. The effect on incentives depends on whether Bitcoin’s value grows more than 50%, which it has in the past.