The last time a Bitcoin Block reward halving happened was on November

28, 2012 (from 50 to 25 bitcoins per block). And that was also the first

ever in the life of the cryptocurrency.

By then, many people didn’t know bitcoin, over $1 billion hadn’t been

invested in Bitcoin startups and the average daily transactions on the

bitcoin network was about 45,000 (contrasted with over 250,000 today).

Indeed, a lot has changed since then.

July 11th, 2016 presents the next Bitcoin block reward halving. From

that date onwards, miners will receive 12.5 instead of 25 bitcoins for

every block that they help confirm on the blockchain.

With the past four years’ growth, the impact of this halving will

reverberate way more than the 2012’s.

In this post, we will answer several questions about this event.

What is a bitcoin block reward?

Bitcoin is a peer-to-peer payment method. There is no trusted third

party to facilitate the transactions. Nevertheless, there is the need

for infrastructure (hardware and software).

Moreover, someone needs to ensure that only genuine transactions are

included on the bitcoin’s distributed public ledger (the blockchain).

This is what Bitcoin miners do. They provide the infrastructure as well

as secure and confirm transactions on the blockchain.

These private and independent individuals are spread all over the globe.

But the network they form effectively establishes consensus on the

status of the blockchain.

For their effort, the miners are rewarded with the new bitcoins. Satoshi

Nakamoto, the inventor of Bitcoin, designed the protocol such that a

miner who wins in the competition to solve the mathematical problem that

secures the next block of transactions takes the new bitcoins.

The bitcoin block reward is, therefore, the bitcoins that a miner gets

for helping secure the next block of transactions on the blockchain.

The award is fixed for a batch of 210,000 blocks, which take about four

years to add to the blockchain. After that, it halves.

Why is Bitcoin block reward halving?

Bitcoin is a deflationary currency. Its supply is fixed (or was fixed

from the word go). The total amount of Bitcoin units that will ever be

in circulation is capped at 21 million.

The last bitcoin is expected to be mined sometime in May 2140.

This is different from fiat currency. There is no total amount of the

dollar, Euro or Yen units that will ever be printed. The volumes in

supply are at discretionary of the central bank (the Federal Reserve in

the US).

By not pre-mining all bitcoins, Satoshi Nakamoto ensured that a gradual

release of new units will act as a motivation for those who support the

network.

What happens to miners after the year 2140?

At the moment block reward is the primary source of revenue for miners.

Obviously, with it halving after every four years, this is not going to

be the case for long. In the next few years, the reward per block will

have significantly shrunk.

With that, it may seem like the motivation to maintain the Bitcoin

network will disappear. And with that the cryptocurrency will die.

Good news is there is a source to replace the mining reward. And that is

transaction fees. With time, users will be required to attach fees to

each transaction they send out for it to be included on the blockchain.

Indeed, this is already happening. It is voluntary at this stage, and it

is only supposed to hasten the process of confirming a transaction. At

the moment, those who attach transaction fees and those who don’t, all,

in the end, do get their transactions confirmed by the network.

But with little or no mining reward in future, the transaction fee will

become mandatory. That is because it will be the only source of revenue

for miners.

Wouldn’t that make bitcoin as costly as other methods of payment?

The hope is that bitcoin will forever remain far cheaper option than the

centralized payment methods like PayPal and credit cards.

That is supposed to be the case even when miners will rely solely on

transaction fees as their primary revenue source.

Each passing day, people around the world are discovering Bitcoin. This

means the volume of transactions on the Bitcoin network will keep

growing.

With the economy of large scale, individual transactions can be charged

low. But, at the same time, miners can collect sustainable revenue from

the high number of transactions they confirm.

Even more, Bitcoin offers other benefits aside from low cost. It is more

private, faster and secure than the other payment methods. These

benefits might make paying extra in transaction fees acceptable to

users.

How will the halving impact the bitcoin price?

Bitcoin is digital gold. It is an asset just like physical gold for all

intents and purpose. That makes the law of supply and demand apply to it

too.

With the reduction in the supply of new bitcoins by 50%, it is expected

that the price of the cryptocurrency will respond by going up. What

might not be clear, however, are the exact margins by which it will

surge.

With that being said, it is important to have it back in our minds that

there are other factors that might come into play. These factors might

force the bitcoin price to go further up, remain at the same level or

even go down.

For instance, the reduction in the block reward might make some miners

exit the Bitcoin network. This could result in a bad user experience

like delayed confirmation, which in turn, could make some users to seek

out and thus drive the price down.

There is also the likelihood that the expectation that the price will

shoot up after the halving could be making many over-buy before it

actually happens. This might drive the price down after it happens

because everyone then will be seeking to sell.

All in all, everything points to the Bitcoin price going up, somehow, as

an effect of the Bitcoin block reward halving.