The Bitcoin Halving Will Lower the BTC Inflation Rate to 1.8%

0

In less than two months the time will finally come for the long-awaited ‘Bitcoin halving’. That is the moment when the amount of bitcoins that is mined per block is halved. At the moment the miners still receive 12.5 BTC per block, but after the halving, it will only be 6.25 BTC. As a result, inflation of the money supply in the bitcoin economy will for the first time be lower than the target number that economies use worldwide.

Halvings are preprogrammed in the Bitcoin code and take place every 210,000 blocks, approximately once every four years. So far there have been two Bitcoin halves: in 2012 and 2016. The third Bitcoin halving is now approaching and will take place in about two months.

Due to a changing hash rate of the miners, the exact date is difficult to predict, but according to current expectations, the next halving will take place around 12 May 2020.

Bitcoin halves

In the beginning, when Bitcoin was launched in 2009, the miners received 50 BTC per block as a block reward. After the first Bitcoin halving in 2012, the block reward decreased to 25 BTC per block. The second halving in 2016 reduced that even further to the 12.5 BTC per block that applies today. After the next halving on block 630,000, each block will only contain 6.25 BTC.

This process repeats itself until the number of bitcoins that can be mined per block has decreased to less than the lowest possible amount of bitcoin: 1 satoshi. This will probably be around 2140. After that, a further halving is no longer possible and the miners no longer receive block rewards.
inflation btc - The Bitcoin Halving Will Lower the BTC Inflation Rate to 1.8%
There will then be a total of 21,000,000 bitcoins in circulation. That is the maximum amount of bitcoins that will ever exist. That number is therefore not simply invented, but a mathematical consequence of the halving mechanism.

The vast majority of these 21 million bitcoins are already in circulation. Some 18.2 million bitcoins have been mined over the years. For the coming 110 years, therefore, there are only 2.8 million bitcoins left to mine. More than half of them are mined even before 2030.

Economic consequences

The miners will receive fewer new bitcoins after each halving and can therefore sell fewer bitcoins on the free market. Since markets are driven by supply and demand, some expect that this can have beneficial effects on the bitcoin price. The supply of new bitcoins to enter the market will fall by half as a result of the halving, while demand will remain the same or will increase gradually.

Yet it is questionable whether these effects immediately penetrate the market. After all, the daily supply of new bitcoins on the market is relatively small in relation to the total trading volume and the economic consequences may therefore only gradually penetrate the market. However, speculation could lead to the price responding to developments earlier.

Inflation

The preprogrammed, predictable and unchanging emission of bitcoins in the bitcoin economy is one of the properties that makes bitcoin fundamentally different from traditional currencies. With traditional currencies, the aim is usually to keep inflation stable at around 2%. The value of the money then decreases annually by an equal percentage. Consumers and citizens can experience the effects of this through rising prices for goods and services.

With traditional currencies, there is in principle no limit to the maximum amount of currency that can possibly be put into circulation. If the economic policy fails, it can even lead to hyperinflation. In many Western countries, wealth is generally not stored in traditional currencies, where it loses a little value every year, but in assets such as shares and real estate.

Scarcity

Bitcoin, on the other hand, works on the basis of scarcity, much as it is with gold and other precious metals, this is why many call bitcoin the digital gold. There can never be more than 21 million bitcoins. Initially, there is inflation of the amount of bitcoins, but that is rapidly decreasing to a negligible level and eventually flattening out in 2140. At the moment, inflation in the Bitcoin economy is slightly less than 4%, but after the upcoming halving, it will decrease to less than 2%. It will therefore for the first time be lower than inflation in most Western economies.

This inherent and unchanging economic policy makes bitcoin extremely suitable as a store of value and therefore better than traditional money. In his (extremely accessible) book The Bitcoin Standard, economist Saifedean Ammous even states that Bitcoin is the ‘ hardest ‘ money the world has ever seen. More recently, Bitcoiner PlanB also made an important contribution to this line of thought with its now much-discussed economic Bitcoin Stock-to-Flow analysis.

Miners

Bitcoin halving is also an important moment for miners. After all, from one day to the next, the miners reward is cut in half, while still having to use the same amount of energy (and therefore money) for it. A bitcoin halving therefore ensures that the cost price for a bitcoin increases. Some also see this as a reason why the halving can have a favorable effect on the bitcoin price. After all, miners will not like to sell their bitcoins below cost.

However, others point out that miners can also decide to turn off their equipment because they are no longer profitable. A fall in the hash rate could happen. Bitcoin, however, has a so-called ‘ difficulty adjustment mechanism ‘ that automatically adjusts the difficulty of mining to restore balance and profitability.

Share.

About Author

Ethan Hunt

Bitcoin Maximalist and Toxic to our banking and monetary system. Separation of money and state is necessary just like the separation of religion and state in the past. Also, pro-local, pro-global and anti-national.

Disclaimer: All content found on 7bitcoins.com is only for informational purposes and should not be considered as financial advice. Do your own research before making any investment. Use information at your own risk.

Leave A Reply

As Featured In