Bitcoin’s 2016 Halving: What is It and Why Should You Care?

In 291 days a major event is going to happen in the Bitcoin ecosystem – The Block Halving. Although it may sound like a pagan ritual which includes the sacrificing of virgins and opening gateways to parallel worlds, the block halving event is real and it’s important.

Let me explain.

The supply of Bitcoin is finite

Whenever a miner solves a Bitcoin block he gets Bitcoins as a reward, that’s how Bitcoins come into this world.

When Satoshi Nakamoto set up the rules for the Bitcoin protocol he stated that the number of bitcoins generated per block is set to decrease geometrically (by 50%) every 210,000 blocks. Since 6 blocks are found on average within an hour and halving happens once every 210,000 blocks, this means that every 4 years (give or take) there will be a halving event.

This basically means that the reward the miners will be reduced to 50% of what it used to be. So if today each miner receives 25 Bitcoins for solving a block, after the halving event he will receive only 12.5BTC. Following this math, the final number of Bitcoins will be roughly 21 million(20999999.9769 to be exact) in the  year 2140.

Of course the fact that 21 million Bitcoins have been generated doesn’t mean that there are actually 21 million Bitcoins that can be spent. You need to take into account that there are many lost Bitcoins which will never be recovered (it’s assumed that 1/3 of the Bitcoins mined until today were lost).

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Why should you even have a halving event?

“The main reason why this is done is to keep inflation under control. One of the major faults of traditional, “fiat”, currencies controlled by central banks is that the banks can print as much of the currency as they want, and if they print too much, the laws of supply and demand ensure that the value of the currency starts dropping quickly. 

Bitcoin, on the other hand, is intended to simulate a commodity, like gold. There is only a limited amount of gold in the world, and with every gram of gold that is mined, the gold that still remains becomes harder and harder to extract. As a result of this limited supply, gold has maintained its value as an international medium of exchange and store of value for over six thousand years, and the hope is that Bitcoin will do the same.” ~ Vitalik Buterin, Bitcoin Magazine.

So when will the next halving occur?

Well, since we know the average block generation time (10 minutes) we can estimate that the next halving event should occur on July/August of 2016. There are websites such as BitcoinClock which show you a countdown until the next event.

Having said that, some community members have noticed that in fact, since the creation of Bitcoin, a new block has been created every 9 minutes and 20 seconds on average and not every 10 minutes as presumed. This is 7% faster than the presumed time of 10 minutes. Taking that into account,  the next halving will be on Jun 20, 2016.

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How will the Bitcoin halving effect the bitcoin economy?

Of course the main question people want to know is “will this affect Bitcoin’s price?” and the answer is “nobody knows”. There are arguments in favour of two scenarios – either the price will rise, or nothing will change.

Some claim that the halving event is well known to the community and therefor will not surprise anyone or cause a major change in Bitcoin’s price. Others claim that due to shortage in “Bitcoin supply” the price is bound to climb as demand will increase. However no one seems to think that the halving may lower the price of Bitcoin in any way.

The same debate happened before the last Bitcoin halving in 2012 and nothing actually happened to the price. Of course back in 2012 Bitcoin was much less known to the general community.

On November 28th 2012 the first Bitcoin halving occurred when block 210,000 was solved. Back at the time Bitcoin’s price was $13.42 and the halving didn’t seem to effect the price that much. Shortly after Bitcoin’s price spiked to $230 but many attribute that to the Cyprus bailout.

Having said that I personally believe that Bitcoin hasn’t been that  widely adopted so such an event will have a significant effect on it’s price, what do you think?

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