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The Bitcoin Halving, scheduled for approximately mid-May, 2020, is a recurring event every four years and is what the crypto community celebrates as a holiday of sorts. This is the third instalment of the Bitcoin Halving information series. Here we’ll be taking a deep dive into what the Bitcoin Halving means for miners.
What is the Bitcoin Halving?
You can read our previous article, what the Bitcoin Halving means for beginners if you are a complete newbie. Or try our most recent article, what the Bitcoin Halving means for investors where we have a more detailed explanation of the halving.
Basically, the Bitcoin Halving is an event that reduces the rate at which new bitcoins are created and cuts the block reward that miners receive in half. This means that miners receive 50% fewer Bitcoin rewards than before the halving.
But what does that mean for the miners who solve complex mathematical equations to verify new blocks into the network? We’ll tell you all about it in this article.
Why mining Bitcoin is similar to mining gold - and why it’s different
The Bitcoin Halving is not part of Bitcoin’s “monetary policy” to reduce what miners earn, though it may look like it at first glance. It’s there to control Bitcoin’s inflation rate. Unlike fiat currencies like the euro or the US dollar, which the government can produce without limits, Satoshi Nakamoto’s aim was to create strict rules.
Therefore, there is a limit to Bitcoin’s total supply in order to avoid devaluation by issuing new Bitcoin at will. Plus, the halving mechanism means that the supply of new Bitcoin decreases over time. Bitcoin is similar to scarce commodities in many ways, such as gold, palladium or other precious metals. But unlike those assets, we are able to calculate and predict how the supply decreases over time and how much Bitcoin is still not mined.
Bitcoin mining activity may decrease
As the block rewards become less significant, some miners may come to the conclusion that mining is no longer affordable due to the electricity and hardware costs since they don’t earn enough through new Bitcoin to justify their ongoing costs. We can speculate that the market will become more decentralised as a result of the loss of miners.
However, the speed at which the blocks are mined and bitcoins are distributed into the ecosystem will not be affected, as the software is designed to adjust the difficulty of verifying transactions in order to maintain a steady amount.
Will mining still be profitable?
It all comes down to the price of Bitcoin at the time of the halving. Taking into consideration the past halvings, the halvings reduce miners profitability (at least in the short term), but depending on the price of Bitcoin at the time, that may not happen. If there is no big increase in the price, mining will only be profitable to big companies who have the equipment and funding to continue. But the halving also acts as some kind of leveller within the mining industry: some miners stop mining because of decreased returns but by doing so, the difficulty goes down which makes it easier for new miners to enter and start mining.
What is a hash rate and why does it matter?
A high hash rate means the amount of computing power (and therefore miners) trying to validate transactions and sign off blocks on the Bitcoin blockchain is high. More miners means higher hash rates and therefore the mining algorithm adjusts its difficulty (mining becomes more “difficult” the more computing power that goes into it). A higher intake of miners means a safer and more secure network, but it can also mean that there is centralisation when only big players can afford to mine. Or vice versa, more decentralisation if smaller players start to participate.
If the reward halves, then the hash rate might have a steep decline as fewer miners are participating in the network. However, if we speculate that the drop in hashrate cases caused the price of Bitcoin to rise (due to less supply being created) then the value of the now smaller reward will be increased.
By the way: the hash rate for Bitcoin has been reaching all-time highs in 2020, which could mean a positive reaction from Bitcoin.
What will happen when all the bitcoins are mined?
When all 21 million bitcoins are mined (which is estimated to happen in the year 2140) miners will no longer receive bitcoins as rewards to solve complex transactions. But don’t worry, they will of course receive another form of compensation for their work, such as being paid in transaction fees from those making payments.
If you would like to learn more about what a miner is and how it works, check out this Bitpanda Academy lesson.