Bitcoin’s Monetary policy-The Halving
If I say that Bitcoins are limited and their supply will stop after reaching a target value, what will be your inference about Bitcoin’s supply and monetary policy?
What will happen when there are no more new Bitcoins left?
Does that mean Bitcoins are scarce? Or is it like some precious metal or gem with limited stock? To understand about this better, first get clear ideas about mining.
To read about mining, refer to this- Mining in Blockchain.
Now let’s talk about Bitcoin’s monetary policy!
This is based on two pillars: the halving policy and block frequency. Here we will talk about Halving in detail.
What is Halving? Well, Halving is reducing the rewarded bitcoins to miners for each transaction in half.
In other words, if suppose a miner is awarded let's say 2 Bitcoins for mining a block of the transaction, then after approx 4 years, the reward that the minor will get for mining the block will be 1 bitcoin and after 4 years it will be half bitcoin and it will continue like this.
When referring to Bitcoin, the phrase “halving” refers to the number of tokens contained in a newly generated block.
That means, when a block is mined, whoever mines that block will get this fixed amount of bitcoins as rewards along with some fees. So this number of bitcoins for each transaction is contained in any block which will be given to those who mine it.
When Bitcoin first started in 2009, each block had 50 BTC in it, but this number was scheduled to decrease by 50% about every four years. Three halving events have occurred today, and a block now only holds 6.25 BTC. Upon the subsequent halving, a block will only hold 3.125 BTC.
That means probably after 2024, the block reward will be dropped to 3.125 BTC.
Now, what is this time period of halving?
As seen in the above table, after approx 4 years of gap, this halving is done. But it can be slightly less than or more than 4 years. It depends on how many blocks are mined to that day. After 2,10,000 new block transactions, halving is done. This nearly takes a time of 4 years because one block mining takes roughly 10 minutes of time on average!
But what if due to a good hashing rate, increased involvement of miners, and a good hardware system, this mining rate increases and is reduced to less than 10 minutes
In that case computing problem of mining is set such that its complexity increases, hence adjusting the mining average to approx 10 minutes for each block. Hence on average, it takes nearly four years for halving to take place.
Putting it simply:
The goal of the Bitcoin mining algorithm is to discover new blocks once every 10 minutes. The time it takes to find blocks will, however, go shorter as more miners join the network and boost its hashing power. This is fixed by restoring a 10-minute objective by resetting the mining difficulty, or how challenging it is for a computer to solve the mining algorithm, roughly every two weeks. The average time to find a block has constantly stayed under 10 minutes despite the exponential growth of the Bitcoin network over the past ten years.
21 Million bitcoin target
The total supply of bitcoin is 21 million only. That means once 21 million bitcoins enter the supply chain, it will no more generate new bitcoins.
When the intended limit of 21 million is achieved, this awards system will end around the year 2140. At that point, network users will pay fees to miners in exchange for processing transactions to reward them. These fees make sure that miners continue to have a reason to mine and maintain the network.
Each block in the chain that was mined in 2009 earned a reward of 50 bitcoins. After the initial halving, there were 25, then 12, then, as of May 11, 2020, there were 6.25 bitcoins every block.
Isn't it like the supply of a scarce gem which is finite on earth, if the amount of gem extracted from the Earth were to be halved every four years. A “halving” of a gem every four years can increase its price since the value of a gem is based on its scarcity.
The halving represents yet another decrease in the pace at which new Bitcoins are created as the overall maximum number of bitcoins, which is 21 million, approaches its finite supply. Only over 2.15 million bitcoins remain to be released through mining incentives as of October 2021, with approximately 18.85 million already in use.
Impact of halving on various stakeholders
From the perspective of an investor, due to the decreased supply and greater demand, halving typically leads to higher cryptocurrency prices, which is excellent news for investors. In advance of the halving, trading activity on the cryptocurrency’s blockchain intensifies.
However, the logistics and circumstances surrounding each price halving affect how quickly prices rise.
On the other hand, for the angle of minors, rising demand and prices for bitcoin are caused by its declining supply. However, fewer incentives can also make it more challenging for solitary miners or small mining operations to survive in the Bitcoin ecosystem since they may find it challenging to compete with big mining operations.
Conclusion
The final 21 million bitcoins that have ever been mined will have been extracted around the year 2140. Since there won’t be any more new bitcoins to be discovered, the halves schedule will end at this point. However, miners will still be motivated to keep validating and confirming new transactions on the blockchain because the value of transaction fees paid to miners is anticipated to increase in the future due to a higher volume of transactions with fees attached and a higher nominal market value for bitcoins.
