The cryptocurrency craze was born off of the back of the most popular crypto: Bitcoin. However, for all of its popularity and infamy, few know one of the most critical data points on bitcoin. Some of those who own bitcoins don’t even know about the process of bitcoin halving that the cryptocurrency goes through automatically. Learning about the halving process is important for an investor to think about when to get into bitcoin.
What is the bitcoin halving process? As more and more bitcoins are mined every day, there is a finite total number of bitcoins in the world that are being depleted. For every 210,000 bitcoins mined, the bitcoin process takes place. The supply of new bitcoins is cut in half as is the miner’s profit off of a bitcoin block mined.
One of the most infamous currencies in the world is bitcoin, and surprisingly, few people outside of its network understand or even know about bitcoin halving. The necessary process is that as miners ‘mine’ more Bitcoin to add to the blockchain, they could be theoretically devaluing the Bitcoin through inflation. This is an Economics 101 situation. With more supply and with less demand, the price of anything is inevitably going to fall.
As an investor, it is essential to know when bitcoin halving will happen next, what happened the last time it was halved, and when you should buy or sell due to the volatility of bitcoin during halving periods.
What Is Bitcoin Halving?
To control the inflation of bitcoins as more and more are mined, there is a protocol programmed into the blockchain that reduces the miner’s reward by 50% for verifying transactions. Miners have an incentive for mining new Bitcoin blocks and adding them to the available world-wide chain of the cryptocurrency. There will only ever be 21 million Bitcoins available. Hence, as more and more are mined, they become more precious, thus solving the supply and demand problem.
Background On Bitcoin Mining
Let’s start out by stating that mining for bitcoins is hugely reliant on resources. In an incredibly detailed and insightful article of statistics about Bitcoin energy consumption, Digiconomist estimates that the average electrical use for mining bitcoins world-wide is equal to all of the country of Columbia’s annual electrical usage.
The annual revenue of bitcoin miners is over $4 billion, while the cost of mining is nearly $3.5 billion. When you take these statistics into consideration, you can realize that mining is not easy, but can be rewarding. Without a mechanism in place to half the output of new bitcoins to those joining them occasionally, miners would mine all of the bitcoins too quickly and flood the world market, which would skew the supply and demand equation.
Why Is Supply And Demand Important To Understand When Considering Bitcoin Halving?
When discussing Bitcoin halving, you have to understand the underlying economics of supply and demand. The Bitcoin halving protocol was put in place at every 210,000 bitcoin marker to control the amount and application of the bitcoin market and keep the price reasonably steady. Since there is a cap, Bitcoin is based on deflationary asset logic; the whole basis of bitcoin is centered on meaning. Basically, mining and the halving of bitcoin output to miners keep the situation of supply being too high and demand being too low for bitcoin, which would decrease the price substantially.
What Is Bitcoin Mining?
For those new to the world of cryptocurrency, mining is the process of using specialized mining equipment to decode “cryptographically hard puzzles” in order to receive blocks of bitcoin to add to the world-wide blockchain. The material used could be potentially very costly with some devices like the Bitmain Antminer S17 costing over $2,500 and requiring vast amounts of electricity to run while you mine(https://blog.hubspot.com/marketing/bitcoin-mining-hardware).
The function of the miner is to pick up transactions in bitcoin from users as they get queued in the “mempool” to try and form their block. If the miner is able to create a block with the needed requirements, it gets added to the Bitcoin blockchain. If you need more basic information on how cryptocurrencies work, read our beginner’s guide or why blockchains need cryptocurrency.
CHAPTER 1- What is Bitcoin mining?
Bitcoin mining forms the blockchain and secures the network as more and more transactions are made with bitcoin. This security that is performed by miners is essential to the whole process of the cryptocurrency of bitcoin. The miners keep the safety of the system going and protect it from being attacked or becoming ruined by hackers. Miners receive new Bitcoins and fees for their work connecting the blockchain of bitcoin transactions.
CHAPTER 2-How Does Mining Work?
Miners of bitcoin have three essential jobs; they secure the network, issue new Bitcoins, and confirm transactions of existing bitcoin. Below are the details of these three jobs. Once we understand how mining works, we will begin to understand why halving bitcoin payouts to miners is significant.
As miners continue to mine, they make the network more secure. The only way to destroy or reverse a bitcoin transaction is to have 51% or more of the processing power of the blockchain. As long as there are multiple blockchain miners for bitcoin, the processing power is spread out over many different places and keeps the system safe and in check.
Issuing New Bitcoins
Miners are rewarded new bitcoin for the transactions that they process in the system. This is down every ten minutes and is how new bitcoin are introduced into the world. Miners cannot create bitcoins; they have to be earned when they complete a transaction and arrange another block of the chain of cryptocurrency code.
Confirm Existing Bitcoin Transactions
A transaction of bitcoin can only be considered real and secure when it is added to a block by a miner. It takes more confirmations from miners for more significant bitcoin transactions to go through and be secured, or they could be reversed.
An excellent resource for learning more about bitcoin mining is the buybitcoinsworldwide.com site which has six chapters on the extraction of Bitcoins: CHAPTER 1- What is Bitcoin mining?, CHAPTER 2-How Does Mining Work?, CHAPTER 3-How to Mine Bitcoins, CHAPTER 4-What is Mining Hardware?, CHAPTER 5-What are Mining Pools?, and CHAPTER 6-Is Bitcoin Mining Legal? Each of the chapters is summarized below for a brief overview of the entire mining process.
CHAPTER 3-How to Mine Bitcoins?
The average person is going to have trouble mining bitcoin. This is because of the large amount of electricity that is needed to confirm the transactions in order to get your new Bitcoin rewards. The best places to mine bitcoins efficiently are usually in places like warehouses where you can get electricity cheaply.
If you still plan on mining as a hobby or as an interest, there are three significant steps that you should take in the process of becoming a bitcoin miner: get a bitcoin wallet, get bitcoin mining hardware, and join a mining pool.
Download A Bitcoin Wallet
Chances are if you already own bitcoin, you have a bitcoin wallet. Everyone knows that cryptocurrency exchanges are not a right place to store your currencies because you are at threat of being hacked and losing your bitcoin. When you earn bitcoins by mining, you can set it up for them to go automatically into your bitcoin wallet.
Purchase Bitcoin Mining Equipment
An application-specific integrated circuit or ASIC miner is a device that is designed to mind specific cryptocurrencies. You will need one that is specific to bitcoin. The cheapest available is around $300, and you could spend upwards of $4,000 on a charming ASIC miner(https://www.investopedia.com/terms/a/asic.asp).
Become A Part Of A Mining Pool
Solo mining is difficult because you will have trouble finding blocks on your own. A mining pool is a way for you to be part of the “hash-rate” of many other miners who have a collective processing speed that is able to take on transactions that you can help out with. You will get a portion of the reward for creating the block based on the sales that your mining pool finds.
What are the Mining Pools?
Mining pools allow you to combine the processing power(known as hash-rates) and take on massive amounts of transactions to create blocks. Mining pools are popular with individual miners looking to jump into the cryptocurrency mining game without much capital upfront.
Is Bitcoin Mining Legal?
Yes, for a vast majority of the world, bitcoin mining is legal. It is just not very profitable for solo miners.
CHAPTER 4-What is Mining Software and Hardware?
The hardware and software of bitcoin mining work together to both process and work with mining pools on the transactions that will make up the pool blocks once you have hardware devices that will actually begin the processing of the bitcoin transactions into blocks you will need the software that handles the processing.
What Is Mining Software For Bitcoin?
The software is how the device for mining is connected to your mining pool. Every device that you use for the processing of bitcoin transactions needs to be linked to both the mempool, and a transaction queue so that you can create blocks quickly.
What Is Mining Hardware For Bitcoin?
Bitcoin hardware is the ASICs that churn out the transactions and blocks on an industrial scale. The mining hardware was initially intended to be done on CPUs, which would have democratized the mining of bitcoin. However, ASICs that can be run in warehouses with cheap electricity are humongous scales to put the value and power of the mining activity in many fewer pockets than what was initially envisioned.
CHAPTER 5-What Are Bitcoin Mining Pools?
The best way for individual bitcoin miners to start out is to join a mining pool. A mining pool basically is a group of cooperating miners who can combine computing power in order to find more transactions to build blocks more frequently. This makes rewards more predictable.
What Is The Downside To Mining Pools?
Although mining pools can give the average bitcoin miner a regular paycheck and a relatively standard return on their investment, the skew of profit goes to the person or company who owns the mining pool. This is something that average miners are usually ok with since they do not have the capital to invest in a large enough infrastructure to get enough transactions fast enough to go it alone.
CHAPTER 6-Is Bitcoin Mining Wasteful?
There are rumors and statistics about the use of electricity it takes to mine Bitcoin, which paint the whole practice in a bad light. However, the use of electricity on bitcoin is powering a billion dollar and possibly even trillion-dollar momentary institution. The payback for electricity use could be tenfold. However, since most energy nowadays is made with dirty energy(coal, oil, etc.), it is a fundamental question that needs to be asked what that electricity is being used on.
Defense of Bitcoin Mining Using Electricity
Economic experts and the media claim that bitcoin‘s dependence on electricity to produce new bitcoin is wasteful. However, some of the benefits of bitcoin include the fact that mining it is a profitable business in a slow economy, that it is not a fiat currency and is backed by tangible data processing measures, and it has protection from inflation and avoidance of capital controls, unlike many monetary institutions of countries around the world. Bitcoin is obviously not the problem but could be the solution. Instead, green energy investment should be the answer to such questions about the electricity use needed to fund bitcoin‘s development and continuance.
What is the Bitcoin Halving?
Bitcoin halving is an integral part of the whole transaction process for a miner. For every 210,000 blocks that are processed by miners, the amount of reward in bitcoin that a miner received for processing and completing a block is cut in half.
The Bitcoin Clock
According to estimates and the amount of bitcoin miners in the world today, Bitcoin halving takes place about every four years. A website by buybitcoinworldwide.com has a visual clock with a countdown to the four-year halving that takes place. According to the Bitcoin halving clock, the next Bitcoin halving will take place on May 15th, 2020.
Why Does Bitcoin Halving Work?
The creator of Bitcoin, Satoshi Nakamoto, which some believe could be a pseudonym, created the halving of bitcoins in order to control their value. Bitcoin is seen as a valuable asset that will rise with time. This makes mining profitable even with the reduced reward every four years.
When Will Bitcoin Halving Occur Next?
Approximately four years from the last time, bitcoin rewards were cut in half, which was July 9th, 2016. The estimated date of the next halving of bitcoin is May 15th, 2020.
Why Does Bitcoin Halving Happen?
Since receiving bitcoin is the incentive for miners to verify transactions, it seems strange that their motivations would be cut in half. However, when considering the supply and demand model, this actually puts more of a premium on bitcoin and makes the bitcoin that these miners do receive more and more valuable as time goes on. Bitcoin halving also ensures that the bitcoin currency remains stable in value.
Why Is Bitcoin Halving Important?
This is the 3rd generation of the cryptocurrency, and it will increase currency speculation and interest. If history tells us anything, the price of Bitcoin will most likely skyrocket after May 15th, 2020, like it did in June of 2016. Knowing this, investors can plan on doubling down before the market for Bitcoin gets hot and goes up in price.
Past Market Pricing Of Bitcoin After Halving Occurred
After the halving of bitcoin rewards for miners in 2016, it took several months for the currency rate to increase. But when it did, it nearly doubled overnight. This time around, the halving of bitcoin rewards will most likely have a more steady progression. However, the value of bitcoin has gone down in recent months because of the Coronavirus Pandemic. Many investors see this as a golden time to get in while the market for bitcoin is relatively cool, and they can ride the post-halving market to substantial capital gains.
Essential Things To Know About Bitcoin Before You Invest
Once you see the potential of the bitcoin valuation and market of bitcoin after halving rewards take place, you will probably want to invest in this cryptocurrency. However, if you are a first-time investor, you need to know several things about bitcoin in specific and cryptocurrency in general before paying large amounts of money to join the blockchain.
The essential things to learn about bitcoin investment include the fact that Bitcoin transactions are irreversible, bitcoins do not remain anonymous, the price of cryptocurrency like bitcoin is volatile, and you will be taxed on any capital gains made from your investments in bitcoin.
Bitcoin Transactions Are Irreversible
The nature of the mining of bitcoins and the transactions that are secured by miners make a completed transaction irreversible. When your transaction goes into a queue waiting to be processed by a miner, it is still not guaranteed and can be reversed by either party of the transaction. However, once the bitcoin becomes a part of a block, and that block goes into the entire Bitcoin Blockchain, it cannot be reversed. The encryption of the blockchain and the spread of computing power by miners make it impossible to reverse transactions.
Bitcoins Are Not Anonymous
Protection of privacy is taken seriously with bitcoin. However, your transactions are not entirely anonymous. All of the transactions that take place are permanently stored on the network and can be viewed publicly by anyone. The identity of the person behind the bitcoin address is anonymous until information from a purchase or other transactions take place. Bitcoin Addresses should only be used one time to protect users’ privacy.
Bitcoin Is Volatile
By this point, everyone understands the volatile nature of the cryptocurrency market. In just the last month, the bitcoin value has dropped over 100& compared to the YTD. Volatility is what drives many people away from investing in cryptocurrency and is precisely why you should learn as much as you can before deciding to invest a dime in bitcoin.
Bitcoin Gains Will Be Taxed
When you register on a cryptocurrency platform to trade and buy currency like bitcoin, you register with official documentation. This is for the tax purposes of the platform, which are reported to the IRS. Any gains realized from sales in a fiscal year off of your purchasing or trading of bitcoin are subject to the taxes that any other investment would be subject to. Keep this in mind before you cash out and start spending!
What Are The Predictions Of Bitcoin’s Market Value In The 2020 Year Of The Halving?
With the hype of the halving of miners rewards making many investors salivate, there are predictions out there that bitcoin will eclipse its most significant value by the end of 2021. There are several reasons surveyed by the top 400 VIP investors of crypto on the Kraken platform that back up this prediction, including the halving session of 2020, adoption by financial institutions, political conflict, the fear of missing out, and economic crisis.
Adoption By Financial Institutions
Investors have been saying for years that blockchain technology is the wave of the future when it comes to financial access and transactions. This is because of the secure nature of the encryption on blockchain technology, as well as the immediate time frame that funds can be accessed. The transactions can be done almost daily if secured by miners, unlike the transaction processing of significant funds, which takes banks up to several days sometimes.
The world’s conflicts can sometimes add fuel to the fire of a bullish market. The political climate of the day seems to favor investments in fringe funds like crypto to branch out and allow others to create generational wealth in new, relatively untested realms of financing. Will cryptocurrencies like Bitcoin be the next financial boom? Only time will tell.
The Fear Of Missing Out
If you have just started to follow bitcoin prices and see them dip, you probably have an urge to buy in the hopes that they will again rise. Or, if you read an article about speculative effects that the halving of bitcoin will have on the market, you may be tempted to take out some money from savings and invest.
The fear of missing out on the next big thing can create what Malcolm Gladwell describes as The Tipping Point. Investors want to be in on the early stages of the influx of funds from people fearing that they will miss a financial windfall from bitcoin before the tipping point happens.
Something else that may have ordinary people and financial institutions alike looking for alternatives to the banks is if there is a severe financial crisis worldwide. Cryptocurrency is seen as a fringe investment mostly because it is not heavily invested in by the world’s elite financial banking institutions. But make no mistake, if there is an economic crisis, crypto might suddenly look appealing as an alternative.
Should You Invest In The 2020 Year Of The Bitcoin Halving?
All answers seem to point to yes. At the writing of this article, the current Bitcoin price is almost half what it was at the end of 2019. With such a tumultuous time, it is hard to say how long the bounce back will take. The only thing that most investors that are big-time multi-million dollar VIP’s in the crypto world seem to agree on is that the bounce back will happen for Bitcoin in a big way and sooner than later.
Bitcoin mining is the engine that drives the security and transactions of Bitcoin’s blockchain. When the rewards for the miner’s work is cut in half, it is only speculative what will happen to the value of bitcoin.
The last halving to happen to bitcoin was in 2016, and within three months, the value of a bitcoin shot up hundreds of percent. With a downturn in the economy of the world due to the Coronavirus at the beginning of 2020, Bitcoin’s growth took a hit and looks sluggish. However, at the publishing of this article, the value is already beginning to tick back up. You might be able to get in on the ground or first floor of another bitcoin boom if you can get in before the internet begins to become littered with advice to buy now! The wait and see still a solid choice. But what is that saying about the bird who gets the worm?
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