What is the Bitcoin halving and how does it affect the psychology of miners and investors? | By @pramodAIML | Capital | June 2021


in short:

  • Bitcoin halving is an event in which mining rewards are halved.
  • This reward halving occurs every four years.
  • This logic of halving rewards every 4 years has been pre-encoded into Bitcoin’s blockchain protocol.

Bitcoin is rightly touted as a store of value and is regarded as digital gold by many cryptocurrency investors and enthusiasts. One of the contributing factors that make it a valuable asset to hold and preserve is its reward halving cycle. This event made it scarcer and increased demand due to supply shocks, which gradually intensified.

Today, we will study this unique phenomenon to understand how it works and why it increases the value of Bitcoin.

Before delving into this issue, we need to understand what is the underlying technology that powers the Bitcoin network.Therefore, we will briefly introduce the following concepts

  • Blockchain network
  • Bitcoin mining and proof of work

Bitcoin blockchain network work:

Bitcoin’s blockchain network consists of hundreds of nodes (computers) running Bitcoin client (mining) software. These nodes store all the transaction history of the entire network. These nodes are owned by ordinary people or enterprises and are distributed all over the world. The key role of these node owners is to approve or reject any transactions in the network.

How do they verify transactions?

Each node participating in the blockchain network as a miner runs mathematical operations and performs a series of checks to verify the correctness of the transaction. They check whether all the considered parameters are valid. E.g, random number The length of the relevant transaction should not exceed the length of the block, which is a predefined rule in the blockchain.

If any node successfully verifies the correctness of the information, the information will become part of the new block and broadcast through the node’s blockchain network. After everyone in the node approves that the information exists, only the transaction is successfully passed, and a new block becomes part of the old Bitcoin blockchain.

Bitcoin mining:

Every user who has the required computer hardware and installed the software to run the Bitcoin client, if he plugs his node into the blockchain network, he will be regarded as a miner. These miners participate in the network to process the above-mentioned transactions and verify their correctness. This process is called Bitcoin mining.

Proof of work:

Now that we have understood the concept of Bitcoin mining, we also need to discuss the consensus mechanism used in the blockchain network to verify transactions and prove that they have been completed.

  • Proof of Work (PoW) is a blockchain consensus mechanism, which requires every node member of the network to make great efforts to solve arbitrary mathematical problems in order to prevent anyone from fooling the network
  • This proof of work is mainly used in the crypto mining world to verify transactions and mine new tokens (as a reward for effort)

So the bigger question now is why anyone is willing to participate in a resource-intensive blockchain network and invest energy and money to verify transactions and mine blocks.

The answer lies in the lucrative mining rewards, which are given to miners in order to conduct real and successful block mining for the aforementioned transactions. The miner is back. But this is not as simple as it sounds.

The value of the reward depends on the capacity and quality of the mining hardware. More power and hard work into the mining process will bring higher returns.

The bitcoin mining process to obtain new bitcoins from the code is digitally equivalent to the physical work of extracting gold from the earth.

Now that you have understood all the technologies at play, it is time to revisit our Bitcoin halving concept and understand how it works.

How does the Bitcoin halving work?

As mentioned earlier, Bitcoin is halved every four years. The most recent Bitcoin halving occurred on May 11, 2020.

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