When you think of cryptocurrencies, you think of Bitcoin (BTC) and Ethereum (ETH) as the two most popular assets on the crypto market. While Ethereum is oriented more towards smart contract functionalities and advanced programming, Bitcoin is considered as the leading type of decentralized, digital cash.
When Bitcoin was launched in 2009 by Satoshi Nakamoto as the first cryptocurrency in the world, many people were quite skeptical of this new financial asset because it didn’t have a physical form like fiat money and it wasn’t backed by any central bank or government. This was actually one of the main benefits of BTC as a fully decentralized digital currency that can’t be manipulated by any central authority or bank.
The Bitcoin blockchain network introduced an alternative financial pathway for transferring funds without the implication of any third parties such as banks. Classic bank transactions take hours or even days, while a BTC transfer usually takes 5 to 10 minutes and it is highly secure thanks to the security measures implemented in the blockchain.
A lot of people see Bitcoin trading and especially BTC mining as a great way to make serious money. One of the characteristics of Bitcoin mining is that it progressively becomes harder through the years by Bitcoin halving.
Let’s take a look at how the BTC ecosystem works and what exactly BTC halving is.
The Bitcoin Blockchain
Bitcoin has introduced blockchain technology as a trustworthy and highly secure way of powering cryptocurrencies and enabling lightning-fast transactions of digital cash worldwide. Numerous altcoins such as Litecoin (LTC), Ethereum (ETH), and others have copied all of the best aspects of the BTC blockchain since its launch in 2009.
A blockchain is a form of a decentralized, distributed public ledger of all transactions on the BTC network. Every single transaction is stored in data blocks, which are set in a chronological string from first to last. These blocks form a chain and this is why it’s called a blockchain. Each block can contain up to 1MB of transaction data, and in order for a transfer to get included within a data block, it needs to get verified by system nodes, that are actually miners with their powerful mining rigs.
All Bitcoin transactions need to be processed through the blockchain in order to get to their final destination. While fiat money exists physically and bank transfers are backed by paper bills of cash, Bitcoin and other cryptocurrencies don’t exist beyond their blockchains. This means that you need some sort of proof that a certain amount of BTC belongs to you.
Private keys serve as passwords that prove your ownership over a specific amount of bitcoins, while your crypto wallet acts as your bitcoin address where other parties can send you some BTC. In any case, all bitcoins stay on the blockchain network at all times and no one can steal them or shift them to another blockchain.
Bitcoin mining is how new bitcoins are created and added into circulation. The total supply of Bitcoin is capped at 21 million coins, which will approximately be mined up until the year 2140, but this may happen even sooner or later because the Bitcoin protocol might get changed in the meantime.
The mining process requires a lot of electricity and computing power. This is why miners invest considerable amounts of money in powerful mining rigs that combine several graphics processing units (GPUs) into one computer that mines Bitcoin 24/7. Mining BTC is the result of processing transactions on the Bitcoin network by miners.
When you send some bitcoins through the blockchain, your transaction needs to get verified by several, independent miners to make sure it’s legit and not some double-spending fraud. Double spending refers to attempts by hackers and malicious individuals to trick people online by spending the same cryptos twice. Fortunately, the Bitcoin blockchain uses a proof-of-work algorithm to prevent such scams from happening.
What Is Bitcoin Halving?
We mentioned that the total number of bitcoins that can be mined is limited to 21 million coins and miners are constantly verifying an ever-increasing number of transactions, which means they are adding new blocks to the network and getting rewarded in BTC. In order to artificially control the speed at which new bitcoins are mined, the block reward is halved approximately every four years or after every 210,000 blocks are added to the chain.
This means that mining gets more complicated every four years and it takes far more time and computing power to mine the same amount of BTC. The halving process will be taking place regularly until the last Bitcoin of the 21 million planned coins is released into circulation. When this finally happens, there won’t be any more block rewards for miners but they will still have a huge incentive to verify transactions because of the transaction fees which will become the main source of income for miners.
BTC Halving Events
When BTC was launched in 2009, the miner reward after the creation of each new block was 50 bitcoins. This amount of BTC didn’t carry much value in fiat currency at that time, but a decade later when a single Bitcoin is worth several tens of thousands of USD, 50 bitcoins is literally a fortune.
The first halving occurred in November of 2012 and the block reward was lowered to 25 BTC, but the price jumped from 12 USD to more than a thousand dollars per coin a year later. The second halving event was in 2016 and it further lowered the block reward to 12.5 BTC. At the time of the halving, the value of Bitcoin was nearly 650 USD per coin, but during the next year, Bitcoin rose to a staggering 19,000 USD after several price increases. The most recent halving—the third one—came in May of 2020, and considering the Bitcoin halving event rule, it will become immensely difficult to mine BTC as time progresses. The next Bitcoin halving is scheduled for 2024 and it will make mining far more difficult compared to previous halvings.
A Few Ending Words…
Bitcoin has introduced a whole new palette of financial services and capabilities with its decentralized blockchain network that enabled fast transactions all over the world. It has also become one of the most traded assets of the 21st century even though it doesn’t physically exist and isn’t backed by company stocks or government institutions and banks.
The BTC halving schedule is an important method for regulating the Bitcoin ecosystem and controlling the inflation rate without the need for a central authority to control the blockchain and the mining process. Bitcoin halving is a self-regulating event that makes sure the market isn’t overflowed with new bitcoin, keeping the currency scarce, and ensuring that miners stay motivated to participate in the network.