Preparing for the Bitcoin Halving
(This note has been posted from White Lodge, Bangkok, on 28th Sept, 2023)
Bitcoin halving takes place approximately every four years, or more precisely every 210,000 blocks. Why does this happen? The event controls the bitcoin creation, and ‘halving’ is a ‘monetary policy’, encoded in its software, aimed at controlling the inflation by reducing the rate at which new bitcoin enters the circulation.
You may recollect, that the inception of the Bitcoin in 2019, had the reward of 50 bitcoins for a block. However, the reduction of 50 bitcoins to 25 bitcoins in the year 2012, to 12.5 in the year 2016, and to 6.5 in the year 2020; are some of the halving that happened. This trend will continue till all 21 million Bitcoins have been mined, which is estimated to occur around the year 2140. But what will happen after 2140? Please read my post at https://immtalimm.blogspot.com/2023/07/what-happens-when-all-21-million-btc-is.html.
Why do people mine, in the first place?
Mining bitcoin aims at decentralization. It is the process where transactions are verified and added to the public ledger, call ed the blockchain. This can offer the following benefits:
1. Financial awards: One of the primary reasons that people mine is for the financial rewards. With the current hovering value of USD 26,000, a single bitcoin can fetch you USD 26,000 +/-. Which means, even with the fraction of bitcoin being mined, you are provided with the financial reward. Bitcoins can be either held as an investment (with the expectation of future prices) or sold for an immediate cash.
2. Support to the Bitcoin network: With the miners participating in the network, miners contribute towards securing the bitcoin network. The process of mining ensures the integrity and security of the bitcoin network, thus, preventing double-spending and maintaining the decentralized nature of the system.
3. The Cryptocurrency Space: In the process of mining, people learn about how the blockchain technology works.
4. Potential for increased value: Looking at the past trends, we see the increasing value of the bitcoin reaching around USD 67,000 in the month of November, 2021. With the trend, either experienced or studied, some miners choose to hold onto their coins, with the hope that the coins will be worth more in the future.
5. Independent income: Given the investment made on the hardware, of course, with the access to cheaper electricity, bitcoin can be a source of income-especially, a form of an ‘independent income’.
6. Advancement in Tech Knowledge: In the process of mining, people can leverage the opportunity to learn in computer hardware, software, networking, and even in the understandings of the electricity. For example, while most of the people have heard about CPU, and GPU, with the inception of mining, people came to know about the ASIC.
Nevertheless, bitcoin mining requires substantial upfront investment as the cost of ASIC hardware, building of mining infrastructures, and the electricity is very huge. In addition, the difficulty of mining increases over time, giving way to the need to upgrade the equipment. Furthermore, there is phenomenal worries in people (who mines), as the halving happens every four years.
The key reasons ‘why. Halving occurs’
1. The control-This can be analogous to the control made by the central bank on the fiat currency for a nation. For example, in Bhutan, the Royal Monetary Authority, controls the flow of the currency. The halving is aimed at controlling the flow of the bitcoins into the market as the maximum supply of the bitcoin is only 21 million.
2. Inflation control-With the reduction in the numbers of bitcoin created, through halving, there is a decrease in the supply of the bitcoins. Thus, this would mean that the supply of the bitcoin is controlled, giving way to the increase in the price of the bitcoin. This deflationary measure distinguishes bitcoin from the traditional fiat currencies, which often depreciate over time due to inflation.
3. Miner incentives-While miners are rewarded for their work (in finding the blocks), the halving decreases the reward, and gradually, giving rise to the transaction fees. In the long run (as the reward becomes minimal), transactional fees will play a significant role in ensuring the network’s long-term sustainability.
What are the implications of the halving?
As is seen in the past trends, the halving, presents a potential risk as well as an opportunity to the miners viz., risk as the cost of electricity will be doubled after halving, for the cost of mining a single coin (when compared to the cost of mining before the halving happens); opportunity, because, halving could potentially increase the price of the bitcoin.
The following will give some considerations for the upcoming halving in 2024:
1. The potential impact of the halving is meant to keep the bitcoin inflation in check-This is the mechanism of the halving.
2. While bitcoin halving has led to significant increase in the bitcoin prices (due to decreased circulation into the market), the case may not be the same post 2024’s halving. This is uncertainty towards ‘market expectations.
3. The halving also tests your decision to either buy or sell the bitcoins. This is the real test on your timing.
4. As a bitcoin investor/user, the security of your wallet, with the security measures such as ‘two-factor authentication’, should be implemented. This way ‘security’ is ensured.
5. Since the value of the bitcoin is quite volatile, you should be prepared to face the significant price fluctuations. Thus, one should know that the bitcoin is a long-term investment rather than a get-rich-quick scheme. This is all about the ‘perspective’ of bitcoin.
6. Diversification-With the potential opportunities and/or risks with the halving, one should strategize the business. For instance, the procurement of the high-end hardware, to harness the scarce bitcoins (after the halving) should be the core motive of the operators. Also, since the cost of mining one bitcoin now; and after halving, is a 2-times increase, the strategy to find some other alternatives of energy source such as solar energy, wind energy, or others should be looked at.
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