Bitcoin Halving 2020
The Bitcoin Blockchain
First, let’s briefly talk about the bitcoin blockchain.
The bitcoin blockchain is basically a live, running record of all the bitcoin transactions.
As I’ve explained in previous videos, the simplest way to understand what blockchain means is by separating the word block from the word chain.
So imagine records of individual transactions, like payments sent to or from one person to another, getting listed or indexed one after the other.
Once a certain amount of transactions in the list has been reached, a block is formed.
This is because each block has a maximum amount of transaction data it can store.
Once the maximum amount of transaction data for the block has been met, the block is added behind a previous block of transactions.
Now, imagine these blocks of transaction records linked together with a chain.
So, blockchain is simply groups of transaction data that are linked together.
The basic structure of the bitcoin blockchain consists of a network of computers around the world with bitcoin software installed on them.
When bitcoin transactions occur, the data is communicated to this network of computers that validate the transaction, add the transaction to their copy of the bitcoin ledger, and then broadcast the ledger changes to the other computers on the network.
There is a maximum amount of data that can be saved per block, so approximately every 10 minutes, a new block of bitcoin transactions is created, verified, and published to the bitcoin blockchain.
If you want a more in depth explanation about what blockchain is and why it was developed, check out my video guide by clicking on the link above.
Next, let’s talk about how all of these bitcoin transactions are getting verified on the bitcoin network.
The verification and posting of transactions on the blockchain is completed by miners via a process called mining.
Miners are people or pools of people that use computer processing power to maintain the bitcoin blockchain.
This includes keeping the ledger of bitcoin transactions clean, consistent, and permanent by grouping new transactions into blocks and broadcasting them to the rest of the bitcoin network for verification.
Each new block of transactions has a cryptographic hash of the block published before it, which is what links all of the blocks of transactions together to form the blockchain.
So, for a new block to be accepted by the network, miners are required to follow a proof-of-work system which involves creating a unique cryptographic hash of the newly completed block.
So new blocks of transactions have a unique hash from the previous block, and to get published to the ledger, it requires the creation of another unique hash, which will go through a validation process, and then get passed on to the next block and so on and so forth.
To create a new, unique hash for the block of transactions, miners compete with each other using computer power to try to be the first one to come up with a 64-digit hexadecimal number (or the hash) that is less than or equal to the current difficulty target of the network, which warrants its own separate video explanation.
So without losing sight of the focus of this bitcoin halving video, check out my other video using link above if you would like to learn more about the technical intricacies of the bitcoin mining process.
The basic concept you need to know about bitcoin mining to better understand the bitcoin halving event, is that miners are rewarded with bitcoin each time they verify a new block of transactions.
Mining rewards are a combination of newly minted bitcoin units that were not previously circulating, and transaction fees of bitcoin that were already circulating.
These rewards are in place to incentivize miners to participate in the mining process to ensure the bitcoin network continues to be audited and essentially maintained.
Cool. Let’s move on.
The Bitcoin Supply
Bitcoin is a digital currency developed by an unknown person or group of people that go by the pseudonym Satoshi Nakamoto.
The more you learn about and start to understand bitcoin, the more similarities you will see between bitcoin and gold.
This is because Satoshi developed the digital currency bitcoin to intentionally harbor characteristics of the precious metal gold.
We recognize this in the mining process we previously discussed.
Prospecting for new gold deposits, building out a mine, and operating a mine to extract gold is laborious, similar to the immense computing power required by bitcoin miners to perform guesswork to create unique hashes to validate new blocks of transactions.
Another gold-like characteristic Satoshi programmed into bitcoin is a maximum supply.
The total amount of bitcoin that can ever exist is 21 million units.
This 21 million unit maximum was established to mirror gold’s stable inflation rate.
You have probably read and watched some content explaining how bitcoin is inflationary, while other content explains how bitcoin is deflationary.
It’s important to understand that there are two different definitions of inflation.
The most modern and common use of the word inflation, refers to a decrease in the purchasing power of money.
The older, traditional use of the word inflation, refers to an increase in the supply of money that is not backed by gold.
In the modern context of inflation, bitcoin is deflationary, because over time, it’s purchasing power will increase instead of decrease due to its fixed supply.
One way to understand this concept is to consider in the future when new gold prospects become extremely rare, and mining costs of new prospects increase until becomes too expensive to mine new gold –
as a result the fixed supply of pre-mined gold increases in value over time, since new gold cannot be created.
Makes sense, right?
In the traditional context of inflation, bitcoin is inflationary because the supply of bitcoin, which is not backed by gold, is increasing as miners mint new bitcoin through validating new blocks of transactions.
Currently, around 18 million bitcoins are in circulation of the 21 million total supply.
According to its current track, the last bitcoin will be mined in the year 2140, which is about 120 years from now.
So in our lifetime, the supply of bitcoin will continue to increase.
What is Halving
Now that you’ve learned a little bit about the bitcoin network, bitcoin mining, and the fixed supply of bitcoin, let’s talk about what halving is, why halving takes place, and what implications halving has for the future of bitcoin.
Halving, in terms of bitcoin, refers to the reduction in bitcoin block rewards issued to miners by half.
Currently, the block reward is for miners is 12.5 units of newly minted bitcoin that were not previously in circulation.
When the halving occurs in May 2020, the block reward will halve, or reduce by half, which will give miners 6.25 units of newly minted bitcoin per validated block.
Halving was programmed to occur every 210,000 blocks.
And since a new block of transactions is completed roughly every 10 minutes, this works out to an average halving event every 4 years.
When bitcoin was first developed in 2009, the block reward was 50 bitcoins.
In 2012, the first halving event reduced the block reward to 25 bitcoins, and in 2016, the second halving reduced the block reward to what it is now at the time of this video: 12.5 bitcoin.
Why does Halving Occur
Satoshi Nakomoto programmed the halving of newly minted bitcoin every 210,000 blocks to prevent inflation from decreasing the purchasing power of bitcoin.
Satoshi also factored in the increase of technological advancement over time into bitcoin’s algorithm, so the faster new blocks are validated, the more difficult creating unique hashes for new blocks will become.
At the current block reward rate of 12.5 bitcoin per block, which occurs roughly every 10 minutes, about 1800 new bitcoin are minted daily, making the inflation rate in the traditional sense, about 3.8% annually.
After the halving of the block reward rate to 6.25 bitcoin in May, about 900 new bitcoin will be minted daily, decreasing the annual inflation rate to 1.8% – which will make bitcoin less inflationary than the US economy.
Halving the amount of newly minted bitcoin in segments controls the rate at which the finite or fixed supply of bitcoin is titrated into circulation over time.
Similar to gold, this creates a predictable, and constantly decreasing inflation rate that will eventually reach 0%.
What Implications Halving has for Bitcoin
Gold is considered one of the best stores of value because of its fixed supply.
And since the supply is not extremely abundant, gold is scarce.
This scarcity is imposed by nature, since we are not able to create gold to increase the supply.
Similarly, the algorithm that imposes bitcoin’s fixed supply, was designed to make bitcoin even scarcer than gold.
So, if demand remains steady or increases for the fixed, scarce supply of bitcoin, the price of bitcoin will experience positive long term effects.
And after the halving in May, the supply of bitcoin will become even more scarce.
So let’s look at what happened after previous bitcoin halvings.
Bitcoin was around $11 when the first halving occurred in November 2012. Then in 2013, a year later, bitcoin spiked to $1,100 – the highest bitcoin had ever been at that time – before dropping back down to around $220 and remaining under $1,000 for the next few years.
In July 2016 during the second halving, bitcoin was around $600 and spiked to $20,000 near the end of 2017, around 18 months later.
Historically, the 12 to 18 months immediately following a halving event, bitcoin pricing didn’t show much movement.
Also, it’s not quite clear that the spikes in prices 12 to 18 months after halving events actually correlate exclusively with the halving.
The first bitcoin price spike to $1,100 happened an entire year after the halving event, and seemed to correlate with the Cyprus bailout.
The second bitcoin price spike to $20,000 happened an entire 18 months, or year-and-a-half, after the halving took place, and seemed to be caused by market manipulation as cryptocurrency was being featured in mainstream media, attracting attention from the masses.
Did the halving have an effect on the spike to $20k in late 2017? Maybe not the spike, but it’s more probable that it’s playing a role in maintaining bitcoin’s price over $3,000 since then.
So what does the historical data tell us about the upcoming halving event in May 2020?
As bitcoin has become more popularized since the last halving in 2016, the upcoming halving in May is likely already priced in and has been for a while.
There is a lot of hype coming out about the impending halving.
So it’s likely that the price of bitcoin drops significantly following the halving event due to so many inexperienced people and investors operating off of the assumption that bitcoin’s price will increase immediately or shortly after the halving.
As with previous halving events, I wouldn’t expect to see any drastic, lasting changes due exclusively to the halving event without a correlating positive or negative outside force like government regulation, market manipulation, an economic event, or similar.
Even then, as with previous halvings averaging 12 to 18 months before noticeable changes, the bottom line is this:
There is a lot of room for opposing theories, opinions, and predictions about the future of bitcoins pricing with regard to the halving in May 2020 and the years following.
So it’s important to do your own research and draw your own conclusions about the impending bitcoin halving.
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So what do you guys think the future holds for bitcoin’s pricing after the halving?
Will the price fall?
Will it rise?
In the comments below, share your post-halving 6 month, 12 month, and 18 month bitcoin price predictions.
Be safe out there.