As you probably know, when mining Bitcoin, every block contains a reward reserved for whoever solves it.
The very first blocks, mined by Satoshi Nakamoto himself, paid a 50 BTC reward. Today, blocks pay 1/4 of that, or 12.5 BTC. In May 2020, that reward will halve once more to 6.25 BTC per block.
Why is the reward getting smaller, you might ask?
Halvings, Halvenings or HalFinnings?
The reward gets smaller because that’s how Satoshi designed Bitcoin back in 2008. It’s supposed to be a deflationary currency, which contrasts with traditional currencies like the US dollar or the Euro, which are inflationary. The supply of traditional currencies, also known as fiat money, never ceases to increase.
Bitcoin, on the other hand, halves the inflation amount, equal to the reward per block, every 210,000 blocks.
That’s 210,000 times ten minute blocks, which yields 2.1 million minutes, or roughly 4 years. (In case you’d ever wondered how many minutes there were in 4 years…)
In May of 2020, Bitcoin will halve again. Which means that Bitcoin miners from around the world will start earning, on average, half the amount of BTC than they do now.
Mining pools split the reward between all the miners, proportionally to the hash rate each has contributed to solving a block. Which means that, on average, after the halving all pool participants will also earn half of what they did before.
Should you be worried?
In short, no.
There’s no need to be concerned at all.
There are 2 scenarios to consider: either you’re a miner or a trader/HODLer.
Let’s take a look at each case.
1. The Halving from the Miner Point of View
Miners are obviously the most affected by this, because the rewards become 50% smaller per block.
Interestingly, though, this does not hurt miners as much you’d imagine!
Traditionally, some time after halvings and despite high price volatility, Bitcoin U$ price tends to increase more than twofold. Which means that your previously saved coins, and the newly mined ones, are now worth more than twice as much as they did before.
Miners who have cash reserves, and who can withstand the initial impact on cash flow, will usually end up making the same amount of U$ or more on newly mined coins than they did before the halving. Even more so if they were able to save up previously mined reserves.
The main point being that mining returns don’t have to be immediate if you manage cash flow responsibly.
Mined reserves can be held for the long run, or for as long as miners can sustain the cash flow to keep mining while settling current bills on time.
For example, anyone who mined BTC back when the reward was 50 BTC per block (2009 to 2012) would be holding millions of U$ today if they were able to not spend that BTC until present day. The astronomic gains made by Bitcoin since this period (over 90,000% between 2009 to the time of this writing) would easily cover present day mining costs for a very long time, even if the miner didn’t spend a single recently mined BTC.
Therefore the miners, who are usually the most concerned about the halving, have no reason to worry if they’ve practiced sound financial habits.
It’s all about having enough reserves to be able to hold on until BTC doubles in U$ price again, which might happen quickly or a few months later.
Note, though, that lots of miners aren’t in it for the U$ but for BTC itself.
Unfortunately the BTC supply will dry up. It’s a deflationary currency and satoshis will become scarcer and scarcer with time.
Halvings are just one of the events which cause BTC to become rare.
Bitcoin losses from all sorts of causes are very frequent. Lost keys, failed hardware, software mishandling (like sending BTC to an invalid address), lost hardware and even death are some examples of how Bitcoin gets permanently lost.
2. The Halving from a trader or HODLer’s POV
If you’re a HODLer then you have nothing to fear.
Halving will simply make the amount you hold more valuable. It’s a deflationary system where investors are rewarded for holding long term. Same ideas as miners apply here: if you don’t have a cash flow problem and can afford to keep holding then halvings are your friends.
Since miners have to pay for periodic expenses using fiat money a lot of BTC gets dumped for fiat right upon being mined. This causes BTC price to drop. With the halving the amount available to dump drops 50% and therefore the U$ price of BTC tends to increase. This is the main effect speculators look forward to when investing in BTC before the halving. So naturally there should be a price increase during some time before the halving. Litecoin is currently experiencing this effect. LTC will halve their block rewards in August, approx 2 months from now, so price has been increasing a lot recently. Also their mining hashrate is breaking records and hitting all time high, meaning miners are accumulating as much LTC as they can before the halving. By watching what’s happening with Litecoin you can get a pretty good idea what will happen with BTC in one year’s time.
I hope this short intro gives you a better idea about what happens to price near and after a halving. In all cases if you have a bit of fiat reserves which allow you a couple months cash flow without selling the crypto, then you are likely safe and you have time to make sound investment decisions. If, on the other hand, you must sell the crypto immediately to settle urgent bills then the halving is not a good time to speculate (high volatility periods are rarely ever good for cash strapped speculators, it’s basically just gambling).
Fatured image credit: Christine Majul from Washington State, USA via Wikimedia Commons