Things you should know about Bitcoin Halving
The Bitcoin halving halves miner rewards every four years, impacting its value and miners' incentives, raising questions about network sustainability.
First and foremost, assume you're playing a game with your pals, and the game has a rule that states that every time someone discovers a rare hidden treasure, they receive a large number of gold coins. The secret, however, is that the game is constructed so that finding this wealth grows increasingly difficult over time.
Now, if the game continued to give away gold coins every time someone discovered a treasure, there would ultimately be too many coins floating about, making gold less valuable than before. To keep the game engaging and thrilling, the authors decided to create it such that the quantity of coins you receive each time you uncover the treasure decreases with time.
This is similar to what occurs with bitcoin. In the Bitcoin game, instead of searching for hidden riches, players utilize computers to solve very difficult math problems, which are rewarded with fresh bitcoins. However, much as in our game, if the Bitcoin system continued to distribute large amounts of bitcoins every time someone solved a problem, there would soon be an excess of bitcoins, and they would be worth less.
To keep the Bitcoin game fair and bitcoins valuable, the inventors included a rule that reduces the quantity of bitcoins you receive for answering a puzzle by half every four years. This is known as a "halving."
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What is the bitcoin halving?
Every four years, the total amount of new Bitcoin that miners can potentially win is sliced in half. It's like if you were playing a treasure hunt game, and every four years, the number of treasures you could find was reduced by half. But miners don't just earn Bitcoin for finding new ones; they also earn transaction fees whenever people use Bitcoin. This "halving" wasn't an accident. The person who created Bitcoin, Satoshi Nakamoto, built it into the game's rules from the start. They did it to make Bitcoin even more special over time, like discovering rare treasures that become even more valuable as the game goes on.
In 2009, the system rewarded successful miners with 50 bitcoin every 10 minutes. Three halving later, 6.25 bitcoins are being dispensed every 10 minutes. The process will end once the number of bitcoin in circulation reaches 21 million. A popular estimate is that it will occur sometime near the year 2140.
When is the next bitcoin halving?
The most recent halving happened on April 20, 2024. Before that, miners got 6.25 bitcoins for each successful block they mined. After the halving, that reward was reduced to 3.125 bitcoins.
The next halving, predicted to occur on April 17, 2028, will further cut the reward to 1.5625 bitcoins per block. This reduction continues until eventually, around the year 2140, all 21 million bitcoins will have been mined.
Who chose the Bitcoin distribution schedule? Why?
Bitcoin's mysterious creator, Satoshi Nakamoto, vanished about two years after introducing the software to the world. Since then, there's been no explanation from them about why they picked the specific way to create new bitcoins.
However, some early emails written by Nakamoto give us a glimpse into their thought process. Right after releasing the Bitcoin white paper, Nakamoto discussed the different ways their chosen monetary policy, which determines how miners receive rewards, could affect the currency. They wondered if it might cause deflation (when money's buying power goes up) or inflation (when prices rise).
Back then, Nakamoto couldn't predict how many people would actually use this new digital money, if anyone would at all. They didn't explain much about why they settled on the particular formula they did, simply stating, "Coins have to be distributed somehow, and a constant rate seems like the best formula."
With regular money, like dollars or euros, a special bank decides how many new bills to print or take out of circulation. If the economy needs a boost, they can add more money, and if things get too wild, they can take some away.
But with Bitcoin, it's like a magical jar of candies with a fixed schedule. This means there's a rule written in a special code that says exactly how many new Bitcoins can be made and when. Changing this rule is really hard because it needs everyone who uses Bitcoin to agree, and that's a lot of people!
Also, there's a limit to how many Bitcoins can ever be made, kind of like having a limited number of candies in your jar. This makes them special and valuable, unlike regular money that can keep growing.
The person who created Bitcoin, Satoshi Nakamoto, left some clues that they didn't like how banks and governments controlled money. The first ever Bitcoin transaction included a message about a bank bailout, hinting that Bitcoin was made to give people more control over their money and make it harder for banks to do big bailouts.
So, Bitcoin is different because its rules are set in code, it has a limited supply, and it was made to change how money works, putting more power in the hands of regular people.
How does halving influence bitcoin’s price?
Imagine a birthday party where everyone gets a slice of cake. But every few years, the slices get smaller, and everyone's excited to see what happens next.
People pay a lot of attention to something called a Bitcoin halving because they think it might make the price of Bitcoin go up. It's like when you have a special toy that everyone wants, but suddenly there aren't as many of them. Some people think that if there's less Bitcoin available, but still the same number of people want it, the price will go higher. But really, nobody knows for sure what will happen.
There have been a couple of these Bitcoin halving before. The first one in 2012 showed that when the supply of new Bitcoins went down, the price started going up. The second one in 2016 was also a big deal, with people watching closely to see what would happen. Even though the price dipped a little bit right after, it quickly bounced back and even went higher than before.
After each halving, the price of Bitcoin seemed to go up over the next year. Some folks think this is because of the halving, but others aren't so sure. It's like saying every time you wear your lucky socks, your favorite team wins a game — it might be true, or it might just be a coincidence.
Even though there's been a pattern of price increases after halving, it doesn't mean that one thing caused the other. Some experts think that people just get excited about the halving and start buying more Bitcoin, which drives the price up. So, while halving are important events, it's hard to say exactly why the price goes up afterward.
Why do miners get these rewards?
Okay, imagine you and your friends are playing a game where you're keeping track of who owns what toys. But here's the tricky part: you need to make sure nobody cheats and says they own toys they don't actually have.
So, to solve this, you use special codes to keep track of who owns what. That's like having secret passwords to show who really owns the toys.
But there's another part of the game that's even harder: figuring out exactly when someone got a toy. This is super important because you don't want someone saying they got a toy yesterday when they actually got it a week ago.
This is where the miners come in. They're like the referees of the game. They check all the codes and make sure nobody's trying to cheat by saying they got toys at the wrong time or by making up toys out of nowhere.
Now, why do miners bother doing this hard work? Well, they get rewarded with new toys! This reward is like a big thank-you for keeping the game fair and making sure everyone plays by the rules. Without these rewards, nobody would want to be a referee, and the game would be a big mess!
What happens when block rewards get very small or taper off entirely?
Alright, imagine you're playing a game where you earn points for doing tasks. Let's say you get points for every chore you complete, like cleaning your room or helping with dishes. These points are your rewards for your hard work.
Now, imagine if over time, the number of points you get for each chore gets smaller and smaller until eventually, you don't get any points at all. That would be a bit disappointing, right? You might not want to do as many chores if you don't get as many points for them.
That's kind of like what happens with Bitcoin. Miners, who are like the players in our game, do a lot of work to keep the Bitcoin network safe and running smoothly. They get rewarded with new bitcoins for their efforts. But every few years, the number of bitcoins they get for their work gets smaller. Eventually, it might even stop altogether.
So, what happens when the rewards for miners become really small or go away completely? Well, miners still need to be paid for their hard work. Right now, they also earn money from transaction fees, which are like little bonuses people pay when they send bitcoins to each other. But if the rewards from mining new bitcoins become too small, these transaction fees might need to go up to make sure miners still get paid enough.
However, there's a bit of a problem. If transaction fees get too expensive, it might make using Bitcoin for everyday stuff, like buying toys or snacks, more costly. So, it's like trying to find a balance between making sure miners get paid enough and keeping Bitcoin accessible and affordable for everyone.
Right now, researchers and experts are trying to figure out what the future of Bitcoin will look like when the rewards for miners get really small. Some think everything will be okay, but others worry it might cause some problems down the road. So, it's kind of like trying to solve a puzzle to make sure everyone's happy and the game keeps going smoothly.
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