Bitcoin Halving: Why does it matter? - Smith + Crown
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Bitcoin Halving: Why does it matter?

On July 11, 2016, the second Bitcoin halving occurred. What is the halving and what does it matter?

On July 7, 2016, someone mined Bitcoin block 420,000 and earned 12.5 BTC instead of 25. Known as the “Bitcoin Halving,” this event marks when the reward per block mined (and hence, the number of new Bitcoin created) drops in half. This is part of Bitcoin’s approach to increasing the total monetary supply.

 

Bitcoin Halving

 

This is the second halving in Bitcoin’s history. The first occurred in November 2012, and the next one is slated to occur in 2020. In total, 33 such events will occur, and once 21 million Bitcoin have been created, the reward per block will drop to zero.

Why does the monetary supply matter?

This approach to creating new Bitcoin is one of the unique currency features of Bitcoin. For many fiat currencies, central banks have the authority to create new money, and they do so according to monetary policy, not an algorithm.[1]

Comparing money creation in Bitcoin and fiat currencies is not simple because the economy of fiat dollars is much more complex than that of Bitcoin, largely because it includes debt, which the Bitcoin economy does not. 1 BTC represents one BTC held by one address on an immutable ledger that can only ever account for as many Bitcoins as are in circulation. 1 USD could represent many more, because banks can lend out a portion of the money held in their accounts: if I deposit 1 USD, you could hold a portion of it in a loan while I also am able to spend it.

Why do miners keep mining if they make less money?

The theory is that transaction fees will gradually increase to maintain incentives for miners to keep mining blocks. Each time someone wants to submit a transaction to be verified, they include an extra amount as a mining reward roughly based on the total value of the money spent. Fees aren’t required and the recommended method is actually quite complicated and based on the amount of data the transaction needs. Many Bitcoin wallets and exchanges include them by default, but users have the option of not .

There is some evidence a fee market is taking shape, but they still comprise less than 3% of the total rewards miners earn for getting blocks.

An increase in the Bitcoin price will also maintain incentives for miners. When the last halving occurred, the reward per block dropped from 50 BTC to 25 BTC, but in USD, the reward dropped from approximately $150 to $75. The reward per block today at time of this halving is $8125 – well over 100 times that amount.

 

[1] Central banks can issue debt without printing new “money,” encourage private banks to lend money more or less generously, and otherwise influence the economy through other monetary policy measures. $1000 in US dollar cash can help create many thousands of dollars worth of circulating money, because banks can lend out money that is held in bank accounts, effectively creating new circulating money. The total number of US dollars in circulation is estimated at $1.2 trillion, while the total monetary supply of cash, bank accounts, and mutual funds is estimated at over $10 trillion. Read more about the monetary supply of the US dollar here.