The Bitcoin Halving has taken place
On Monday evening around 9:25 PM, the Bitcoin Halving took place. At that time, the amount of new bitcoins that miners can mine per block halved from 12.5 BTC to 6.25 BTC. This doubled the cost of new bitcoins and the annual inflation in the bitcoin economy decreased from about 3.6% to about 1.8%. For the first time, monetary inflation in the bitcoin economy is lower than inflation in Western economies.
When the 630,000th block was mined from the bitcoin blockchain, something special happened: the Bitcoin Halving. During this pre-programmed event, which takes place every four years, the amount of bitcoins that miners can find per block halved. Before the halving, the so-called block reward was 12.5 BTC per block, but after the halving, each block only contains a block reward of 6.25 BTC per block.
This has important consequences for the bitcoin economy. Bitcoin mining is the only way new bitcoins can enter the market and how the total circulating amount of bitcoins can increase. Halving the amount of bitcoins that miners can find also means halving the monetary inflation in the bitcoin economy. It fell from about 3.6% to about 1.8%. Inflation in the bitcoin economy is therefore for the first time below the target of 2% that central banks in Western economies are using. Bitcoin therefore has a lower monetary inflation than the dollar or euro from now on. Going forward, inflation will continue to halve every four years and eventually level off completely in 2140.
inflation Supply & demand
The supply of 'fresh' mined bitcoins in the market falls by half due to the halving, while no comparable effects occur with regard to demand. Since the bitcoin price is determined by supply and demand through market forces, this can influence the price. That might be a bit like the effects on gold prices that would occur if global gold production were to fall by half. On the other hand, governments and central banks worldwide are creating new regular money on a large scale. Market forces also apply here: due to the increase in money, the supply of the currency on the market grows and that depresses its exchange rate.
So there is more and more money in circulation that is losing value in order to buy up a limited and dwindling supply of bitcoins. Many bitcoiners find this an interesting and exciting development because of the economic implications. It is likely that the economic effects of the halving will not penetrate the market immediately but gradually, as the daily amount of new bitcoins mined makes up only a relatively small part of the total amount traded daily.
Price volatility before, during or shortly after the halving is likely a result of speculation. The fierce price movements that we saw in recent days are probably part of this.
The halving also has all kinds of consequences for the miners. They saw their earnings in bitcoin fall by half, while in principle they have to use the same amount of processor power (and therefore electricity) for it. The cost of mining a bitcoin has therefore doubled due to the halving. Miners who are no longer profitable can now choose to sell newly mined bitcoins below their cost price or wait for a higher price. The first option is of course not very attractive, but may be necessary for some miners to cover the costs. If miners are loss-making for too long, it can lead to them to stop mining completely.
When that happens, the network hashrate drops and blocks are found less quickly. As a result, miners can again lose profitability because they are less likely to mine new bitcoins. Some fear that this will lead to a network collapse, a so-called 'death spiral', but that is not the case. The departure of non-profitable miners ensures that more bitcoins are left for all other miners. As a result, their profitability increases again. This creates a balance in the ecosystem that ensures that only profitable miners remain.
Profitability for bitcoin miners largely depends on the price they pay for electricity. In practice, this often turns out to be cheapest near sustainable power plants, which regularly have to contend with energy surpluses which they have to sell below the market price. Bitcoin miners eagerly purchase this power and thus praise the miners who use more expensive and often environmentally unfriendly power from the market. More than 70% of the electricity that the bitcoin network uses would now come from renewable energy sources. Bitcoin halves make the network more efficient and in a sense.