Roughly every four years, the bitcoin cryptocurrency experiences a halving. This essentially means that the amount of bitcoin rewarded to miners will be cut in half. This is an integral part of bitcoin’s software code with the aim of controlling inflation, or the amount of bitcoins that can be created, and establishing the supply cap at 21 million that will be reached in 2140.
The Bitcoin Blockchain
Every 10 minutes, a new block of bitcoin is added to the ledger referred to as the blockchain that contains all of the transactions within that block of time. Each block added on top of the previous blocks establishes a consensus of the transactions that have taken place, with each miner who solves each block awarded bitcoin. Solving these blocks is very difficult and requires powerful computing. Miners are awarded bitcoin to promote the security of the network and keep it active. Before the first halving in 2012, miners were awarded 50 bitcoins for solving a block. The amount of bitcoin awarded to them dropped to 25, and after the second halving in 2016 the amount of bitcoin awarded fell to 12.5. After the next halving in 2020, the amount awarded will fall to 6.25.
Bitcoin’s 21 Million Unit Cap
Bitcoin’s cap of 21 million units ensures that its value cannot be diluted due to excessive creation of the cryptocurrency. Because of its fixed theoretical cap, the cryptocurrency has been attracting investors who are concerned with the massive money printing of the world’s central banks.
Historically, all fiat currencies have succumbed to hyperinflation, which is an extreme level of devaluation following excessive money printing that occurs usually to pay off debts. While the free-floating fiat global arrangement has been fairly stable since its implementation in 1971, when President Richard Nixon removed the U.S. dollar’s peg to gold, concerns are growing that the system is on the verge of collapse, as industrialized nations are increasingly weighed down by debt and are printing massive amounts of money to keep the system propped up. Increasingly, investors are viewing cryptocurrencies as an inevitable replacement to the easily duplicated paper money used today as a means of exchange.
Bitcoin Halving and Price Correlation
During a bitcoin halving, investors tend to get excited as the price of the cryptocurrency appreciates significantly. While correlation may not equal causation, the relationship between bitcoin’s halving and its price should not be so easily dismissed, given that each halving represents a diminishing supply that will eventually affect its price.
If history is any indication, the price of bitcoin may rise significantly, perhaps more than doubling, after the next halving in 2020. As always, this is not investment advice, and investors should do their own due diligence before investing in bitcoin.