Issue 10 - What is four year phenomenon in Bitcoin?
This week of TBnF article is dedicated to the whole event when the incoming supply of bitcoins gets halved. Sounds interesting? Read along.
You all must have heard about the Olympics, World cup of Football and Cricket. That's correct, I am from India, and I can find a way to incorporate Cricket in every discussion, right? These events unite us all to celebrate hard work and passion. You know, these events have one common link among them. They all take place once every four years, and you know what else happens once every 4th year? #Bitcoin halving.
Even though Bitcoin is a digital currency, it cannot be generated indefinitely. Its value proposition is based on verifiable scarcity. Two principles related to scarcity are fundamental to Bitcoin technology. There will only ever be 21 million Bitcoins available. By the end of 2021, only 10% of 21 Million Bitcoins were left to be virtually "mined.". Second, the quantity of new Bitcoin added to the network will be cut in half every four years. This is what Bitcoin halving is.
Virtual "mining" contributed 12.5 new Bitcoins to the network every 10 minutes at the start of 2020. That sum was cut in half in May to 6.25. It will fall to roughly 3.125 in 2024, and the process will continue until all 21 million Bitcoins are minted (which estimates say should happen around the year 2140).
What is the significance of the Bitcoin halving?
The halving makes Bitcoin's value more probable to climb over time by issuing fewer Bitcoins (Economics 101, right? Demand and Supply). This is in stark contrast to fiat currencies, which generally lose weight due to inflation over time. This is why in the 1960s, you could purchase a Coke for a cent; Inflation is a heartless bitch. The halving is one of the ways Bitcoin's protocol maintains scarcity, which is one of the reasons why millions of people want to buy Bitcoin.
What is the mechanism behind it?
Bitcoin is sometimes linked to gold because, like gold, it is a valued, rare asset that is expected to defy inflation. But, unlike gold, Bitcoin is digital (it can be transported around the world just as simple as sending an email), and its precise scarcity may be determined by anybody. According to the United States Geological Survey, all of the gold ever extracted could fit into little over three (Olympic-size) swimming pools, but no one knows how much gold is left in the ground. New gold discoveries are made every year, resulting in an uncertain supply schedule. On the other hand, Bitcoin has a fixed supply and a predictable supply schedule: there will never be more than 21 million, and fewer than 2.1 million remain to be mined as of late 2021.
Bitcoin is mined in the same way as gold is, except it's done digitally by a worldwide network of computers vying to authenticate Bitcoin transactions.
Bitcoin is used to compensate miners. Every 10 minutes, 12.5 new Bitcoins were distributed in early 2020. In May, the payout was half, bringing it down to 6.25 new Bitcoins every ten minutes.
The Bitcoin mining payment, popularly known as the "block reward," will continue to be half every four years. This will continue until all 21 million Bitcoins have been mined, expected to happen in 2140. (At this time, Bitcoin miners' revenue will come solely from network transaction fees rather than directly from newly generated Bitcoin.)
Additional Bitcoin can't be created in the future. This contrasts with fiat currencies, which allow the government or central bank to generate extra money at their discretion, potentially leading to inflation.
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Wow. This was super helpful.