Bitcoin’s Approaching ‘Halving,’ Explained
(Source: coindesk.com)

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(Original link: coindesk.com)

Next Bitcoin Halving Could Squeeze out Retail Miners, But Jury’s Split on Price “The halvening" sounds like a horror movie about an ax murderer. But it's actually the nickname for one of the most hotly anticipated events in Bitcoin’s history. Sometime in May, the number of bitcoins (BTC) entering circulation every 10 minutes (known as block rewards) will drop by half, to 6.25 from 12.5. It's a milestone that's easy to see coming because it happens every four years and has happened twice before. The allure of possible riches is what's drawing so much attention to the upcoming event, which is more commonly referred to as the halving (some wags like to add the “en” to make it sound ominous). The amount of supply entering the system will suddenly shrink but the demand will, in theory, stay the same, possibly driving up the cryptocurrency’s price. As such, the event has inspired passionate debate about how the market will respond. “The theory is that there will be less bitcoin available to buy if miners have less to sell," said Michael Dubrovsky, co-founder of mining R&D nonprofit PoWx . But the periodic decline in Bitcoin’s minting rate could have a deeper significance than any near-term price movements for the functioning of the currency. The block reward is an important component of Bitcoin, one that ensures the security of this leaderless system. As the rewards dwindle to zero in the decades ahead, it could potentially destabilize the economic incentives underlying bitcoin’s security. For those trying to make sense of this complex topic, CoinDesk offers the following explainer of Bitcoin’s third halving. What is the halving? New bitcoins enter circulation as block rewards, produced by “miners” who use expensive electronic equipment to earn or “mine" them. Every 210,000 blocks, or roughly every four years, the total number of bitcoin that miners can potentially win is halved. Bitcoin supply and subsidy Source: CoinDesk Research In 2009, the system started at 50 coins mined every 10 minutes. Two halvings later, 12.5 bitcoins are currently being dispensed every 10 minutes. This process will end with a total of 21 million coins, probably in the year 2140. Who chose the distribution schedule and why? Bitcoin's pseudonymous creator Satoshi Nakamoto, who may have been an individual or a team, disappeared roughly a year after releasing the software into the world. So, he or she or they (we’ll just go with “they” from now on) are no longer around to explain why they chose this specific formula for adding new bitcoin into circulation. But early emails written by Nakamoto shed some light on the mysterious figure’s thinking. Shortly after releasing the Bitcoin white paper, Nakamoto summarized the various ways their chosen monetary policy (the schedule by which miners receive block rewards) could play out, pondering the circumstances under which it could lead to deflation (when a currency’s purchasing power decreases) or inflation (when the prices of goods and services purchasable with a currency increase). At the time, Nakamoto couldn’t have known how many people would use the new online money (if anyone). They elaborated very little on why they chose the particular formula they did: "Coins have to get initially distributed somehow, and a constant rate seems like the best formula." In most state-issued currencies a central bank, such as the U.S. Federal Reserve, has tools at its disposal that enable it to add or remove dollars from circulation. If the economy is floundering, for instance, the Fed can increase circulation and encourage lending by purchasing securities from banks. Alternately, if the Fed wants to remove dollars from the economy, it can sell securities from its account. For better or worse, bitcoin is a bit different. For one, the supply schedule is all but set in stone. Unlike the monetary policy of state-issued currencies, which unfold through political processes and human institutions, Bitcoin’s monetary policy is written into code shared across the network. Changing it would require an immense output of coordination and agreement across the community of Bitcoin users. "Unlike most national currencies we’re familiar with like dollars or euros, bitcoin was designed with a fixed supply and predictable inflation schedule. There will only ever be 21 million bitcoins. This predetermined number makes them scarce, and it’s this scarcity alongside their utility that largely influences their market value," crypto wallet company Blockchain.com wrote in a blog post ahead of the 2016 halving. Another unique aspect of Bitcoin is Nakamoto programmed the block reward to decrease over time. This is another way in which it differs from the norm for modern financial systems, where central banks control the money supply. In stark contrast to Bitcoin's halving block reward, the supply of the dollar has roughly tripled since 2000 . Nakamoto left clues that they created Bitcoin for political reasons. The first Bitcoin block ...