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Bitcoin uses a system called Proof of Work PoW. This means that miners must prove they have put forth effort in processing transactions to be rewarded. This effort includes the time and energy it takes to run the computer hardware and solve complex equations. Faster computers with certain types of hardware yield larger block rewards and some companies have designed computer chips specifically built for mining.
These computers are tasked with processing Bitcoin transactions and they are rewarded for doing so. The term mining is not used in a literal sense but used as a reference to the way precious metals are gathered. Bitcoin miners solve mathematical problems and confirm the legitimacy of a transaction.
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They then add these transactions to a block and create chains of these blocks of transactions, forming the blockchain. When a block is filled up with transactions, the miners that processed and confirmed the transactions within the block are rewarded with Bitcoin. Transactions of greater monetary value require more confirmations to ensure security.
This process is called mining because the work done to get new Bitcoin out of the code is the digital equivalent to the physical work done to pull gold out of the earth. More information on the technical inner workings of Bitcoin mining can be found in our Bitcoin mining article.
Bitcoin Halving: What You Need to Know
After every , blocks mined, or roughly every four years, the block reward given to Bitcoin miners for processing transactions is cut in half. This cuts in half the rate at which new Bitcoin is released into circulation. This is Bitcoin's way of using a synthetic form of inflation that halves every four years until all Bitcoin is released and is in circulation.
This system will continue until around the year At that point, miners will be rewarded with fees for processing transactions that network users will pay. These fees ensure that miners still have the incentive to mine and keep the network going. The idea is that competition for these fees will cause them to remain low after halvings are finished.
The halving is significant because it marks another drop in Bitcoin's dwindling finite supply.
Bitcoin Explained – Chapter 6: The Fork - The splitting of the Blockchain
The total maximum supply of Bitcoin is 21 million. At the time of writing, there are 18,, Bitcoins already in circulation, leaving just 2,, left to be released via mining rewards. In , the reward for each block in the chain mined was 50 Bitcoins. After the first halving it was 25, then If gold's value is based on its scarcity, then a "halving" of gold output every four years would theoretically drive its price higher.
These halvings reduce the rate at which new coins are created and thus lower the available supply. This can cause some implications for investors as other assets with low supply, like gold, can have high demand and push prices higher. In the past, these Bitcoin halvings have correlated with massive surges in Bitcoin's price. The second Bitcoin halving occurred in July of The theory of the halving and the chain reaction that it sets off works something like this:.
In the event that a halving does not increase demand and price, then miners would have no incentive as the reward for completing transactions would be smaller and the value of Bitcoin would not be high enough.
Why the heck Bitcoin ‘might’ split in two? (explained in plain English)
To prevent this, Bitcoin has a process to change the difficulty it takes to get mining rewards, or, in other words, the difficulty of mining a transaction. In the event that the reward has been halved and the value of Bitcoin has not increased, the difficulty of mining would be reduced to keep miners incentivized. This means that the quantity of Bitcoin released as a reward is still smaller but the difficulty of processing a transaction is reduced. This process has proven successful twice.
So far, the result of these halvings has been a ballooning in price followed by a large drop. The crashes that have followed these gains, however, have still maintained prices higher than before these halving events. While this system has worked so far, the halving is typically surrounded by immense speculation, hype, and volatility, and it is unpredictable as to how the market will react to these events in the future.
The term "halving" as it relates to Bitcoin has to do with how many bitcoin tokens are found in a newly created block. Today, there have been three halving events and a block only contains 6. What do miners like?
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Higher rewards. What do miners like even more? Less competition. Due to the fact that not everyone will have enough money to upgrade their computation power to mine larger blocks profitably, smaller miners will vanish away from the network. We must have a say how we want to run it. With this protocol, there is no place for the sense of ownership. Everybody owns the network and nobody owns the network. Remember when the blocks mined by six of our miners were discarded by the rest four?
The four miners who are working on the smaller block size, will continue mining their own set of blocks and will be making their own version of the longest chain. When that happens, the blockchain will split in two blockchains. Some nodes will be working on one version and some on the other. Bitcoin, the currency, will therefore effectively be split into two. Coins that were collected by users during the Bitcoin Common can be spent on both Bitcoin Classic and Bitcoin Current. However, the coins that will be traded on Bitcoin Classic will be different from those traded on Bitcoin Current.
They will be different in quantity, different in value and different in adoption. They will be as different as any two pre-existing cryptocurrencies can be. But if they are stored in an online wallet, the fate of your coins is in their hands.
Every online wallet will have their own take how they want to proceed with this blockchain split. They might either migrate your coins to one version of the blockchain or allow you to spend on both. It depends. Because of the fork, you might lose your bitcoins into the thin air. After all, bitcoins are nothing but records of transactions. Over last couple of weeks, markets have been more volatile than ever. With this, it seems like bitcoin will avoid the split on August 1, but it is not a guarantee still. This is just a statement of intent from the miners. To really implement BIP 91, majority of the miners will have to upgrade the software on all of their computer before August 1.
Miners running the updated software is still under 50 percent. If the miners stick to their intent over next week too, the SegWit part of SegWit 2x will be activated, and the 2x part increasing the block size from 1MB to 2MB will be on its way later this year, which will be a hard fork. What might happen during the hard fork? What will determine the positive effect on bitcoin and other cryptocurrencies from the halving effect however will be the extent to which it helps remove some of the barriers that have made previous bull runs unsustainable.
For example, bitcoin is still hampered by a lack of scalability given the amount of time it takes for the blockchain to settle transactions preventing it from being adopted widely as a means of payment. Another area of some uncertainty is in regulation.
While there has been some progress in this area since , there is still no robust regulatory framework with the international recognition that would be required to legislate for the trading and settlement of crypto assets. Without this, institutional investors and their deep pockets remain largely on the sidelines, which means crypto remains thinly traded and therefore volatile.
This could stimulate further investment in the space and help address its other shortcomings. Will boosting the UK Government's role in fintech drive tangible change? EBAday Striving for strong instant payments uptake. Agile Series: Motivating Engineers.
After Brexit, Britain seizes the moment for unification across banking, trading and investing. Long reads. News in your inbox For Finextra's free daily newsletter, breaking news and flashes and weekly job board. Sign Up. Channels Cryptocurrency. Editorial what does this mean? This content has been selected, created and edited by the Finextra editorial team based upon its relevance and interest to our community.
Bitcoin halving: What does this mean and what will its effect be? Jamie Crawley Reporter , Finextra.