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Bitcoin is notoriously volatile, prone to sudden price increases and rapid reversals that can wipe out millions of dollars of value in a matter of minutes. Those changes are often mysterious to market watchers, given the lack of fundamentals of the digital currency or links to the real economy. Bitcoin has another peculiarity, one that was incorporated into the code that gave birth to it: from time to time, the formula that governs the speed at which new tokens are created changes. As another similar event, called halving, approaches, Bitcoin supporters and skeptics are debating what kind of impact it can have on the value of the coin.
1. Where does baby Bitcoin come from?
One of the features that sparked a fascination with Bitcoin is the way its pseudonym creator, Satoshi Nakamoto, linked coin creation to the work necessary to prevent counterfeiting. Bitcoin is generated by so-called miners whose computers perform complex calculations that validate transactions on what’s known as blockchain, a public digital ledger. Miners compete with each other to earn newly issued tokens known as a block reward.
2. What is a Bitcoin halving?
A halving, sometimes called a halving, is a planned reduction in the rewards miners receive (the term is mentioned in the Bitcoin code). Halves occur once every four years or so, more precisely, every 210,000 blocks of transactions. As the name implies, each halves the number of Bitcoin miners who receive a block reward. At the Bitcoin launch in 2009, miners received 50 Bitcoin per block, but that reward dropped to 25 in the first half, in 2012, to 12.5 in 2016, and will drop to 6.25 tokens in the next.
3. What’s the point?
Bitcoin issuance is limited in several ways. On the one hand, according to its founding protocol, only 21 million will be in circulation. This is appealing to many who fear that fiat money, of the type issued by governments, may lose its value to inflation if it prints too much. Supporters argue that Bitcoin, by contrast, will be guaranteed to rise. Halving also prevents inflation by acting to periodically decrease the rate at which Bitcoin is created, so as not to exceed demand. For other observers, halves can serve as a signal to rush and buy by suggesting that slower growth could be accompanied by a price increase.
4. When is Bitcoin’s halving happening?
The next one is expected to take place in May 2020 and the internet is packed with countdown clocks. In general, predicting the exact date is difficult because the time it takes to generate new blocks can slow down or speed up depending on several factors. By most estimates, there will be 64 Bitcoin halves before that 21 million high is reached sometime around 2140, at which point the halves will stop. Once that happens, miners will no longer collect rewards and are expected to rely on charging fees for handling transactions, similar to what credit card companies do.
5. Do halves always increase the price of Bitcoin?
That is a matter of heated debate. Following the previous reductions, the price of the token increased. In 2012, for example, Bitcoin gained around 8,000% in the 12 months after the cut in rewards, and again increased nearly 1,000% in the wake of the 2016 cut. Skeptics, on the other hand, argue that attributing price hikes half is misleading at best. The second half came at a time when Bitcoin was already gaining greater general recognition, and coincided with the boom in initial coin offerings, many of which had to be bought with Bitcoin. Paul Donovan, chief economist at UBS Global Wealth Management, for example, says that anyone familiar with Bitcoin’s structure will be aware of its halving processes, but that there are potentially “naive” investors who are not, some of them might be convinced that you buy the token because half is happening. Canaccord Genuity analysts, on the other hand, say halving events have a significant psychological component and may continue to have an impact on Bitcoin’s price.
6. How will miners be affected?
Mining for Bitcoin requires a large amount of energy, both to perform the calculations involved and to cool down the computers that perform them, which is why there are mining outposts in remote corners of the world with cheap hydroelectric power such as Mongolia. The cost of mining a Bitcoin can range from $ 3,500 to $ 6,500 or more, depending on the costs of the equipment, electricity, and real estate used to house the hardware. Competition among miners has also increased, leading to a number of smaller participants going bankrupt. Five China-based mining entities now control almost half of all computing power on the Bitcoin network.
7. If I have Bitcoin, will it change anything for me after halving?
No, except to the extent that any subsequent price changes would leave you richer or poorer. But it will be impossible to know how much of the change is directly due to halving.
8. I have heard of the Bitcoin fork. Is this the same?
No. Forks happen when some group within the Bitcoin community decides to make a change to the token’s software, often to improve its performance. If the change is accepted by the community at large, there is no fork. But if it is used by a minority within the group, it becomes a derivative currency. Those splits are typically released with a new name and new features, and often capitalize on Bitcoin’s name recognition. After a few suckers gained adherents and made their creators money, the forks became more popular. Bitcoin Cash is one of the most prominent spin-offs. Its separation from Bitcoin’s “hard fork” in 2017 triggered a folly that saw dozens of software development teams try to create money by modifying the original computer code in different ways.
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