To answer this question, we must first understand bitcoin mining. When Satoshi Nakamoto created bitcoin in 2009, he (or she) designed a way for new bitcoins to be distributed. This process is completely decentralized.
Bitcoin operates on a process without a central authority that handles its distribution or controls the ledger that holds everyone’s transactions. This process is called bitcoin mining.
Related: What is bitcoin mining?
Miners receive a bitcoin for every transaction they validate into the blockchain. In the beginning, the set block reward for mining was 50BTC. But, for every 210,000 blocks solved, the reward would be cut by half. This event is called bitcoin halving.
WHEN DOES BITCOIN HALVING HAPPEN?
As seen in the table above, from bitcoin’s creation in 2009, each miner who validated a block in the chain would receive 50BTC. But in 2012, the miner only received 25BTC after validating the 210,001st block as per the bitcoin halving event.
This would go on every 210,000 blocks validated in the chain until all of the bitcoins have been mined. The next halving is expected to happen around May 12, 2020 when a miner solves the set of equations and validates the 420,001st block on the chain.
WHY DOES BITCOIN HALVING OCCUR?
Bitcoin halving was created based on the law of supply and demand to keep it valuable. If bitcoin is created too quickly and there was an unlimited supply of it, eventually there would be so much of them in the market. Bitcoin would then lose its value.
So while it may seem “unfair” to receive less for the same type of work, creating scarcity in the greater scheme of things is a good thing to prevent inflation.
WHAT WILL HAPPEN TO THE VALUE OF YOUR BITCOIN?
The truth is that no one is really sure. In 2016, not much happened even a week after the halving. Whatever the effect, bitcoin is still designed to be valuable. There will only ever be 21 million in existence and slowing its distribution through bitcoin halving keeps inflation in check.
Disclaimer: Buying bitcoin and other virtual currencies carries a high level of risk, and may not be suitable for everyone. Read the full BSP advisory to understand the risks of buying, holding, or trading cryptocurrencies.
