What is bitcoin halving?

now the world's most valuable digital currency Bitcoin went through another Haring over the weekend it saw its daily supply of newly minted coins cut by 50% as so what is Haring well to better understand how this works it's important to know that Bitcoin has a finite supply of 21 million that is a hard cap that is embedded into the cryptocurrency code and that limit was established to preserve the value of the tokens and to make them non aary and Hing is meant to slow the supply of coins as it approaches that ceiling now the way they drive this digital scarcity is by reducing the rewards for Bitcoin Miners and new Bitcoins are released through the process of mining so imagine miners has a as a network of validators that verify all Bitcoin transactions in a blockchain and for that they are rewarded mostly in the form of newly minted coins and that serves as incentive so they keep adding blocks of Bitcoin transactions now the Haring aims to reduce this reward making mining less profitable and eventually slowing down the production of new coins so when Bitcoin was first mined in 2009 mining one block would earn 50 Bitcoins the intentional slowing of Supply revisits the crypto ecosystem every four years or after every 210,000 blocks are mined and so on the first Haring in 2012 the payout for mining a new block was halfed to 25 Bitcoins the 2016 and 2020 saw that reward cut to 6.25 Bitcoins and fast forward to this year and now we are in the midst of the fourth Haring where mining rewards have dropped to 3.125 Bitcoins historically the event has caused bitcoin's price to sore the previous three hars have come before every bull run where the coin touches fresh all-time highs and investors are now bracing for another potential rally overnight prices have dipped nearly 1% a year to date Bitcoin prices have already skyrocketed by nearly 53% and part of that is driven by record inflows into new spot ETFs and part due to the potential upside from the Haring and let's bring in omin malikan now a jang professor at Columbia business school to talk more about this Bitcoin Haring well this is a fourth round of Bitcoin Haring and it as we talked about C's you know the rewards being earned by minus cut to 3.125 Bitcoins now it's got more expensive to put Bitcoins into circulation so what does this mean for miners Well normally the having mean that minor revenues fall almost in half Bitcoin miners have two sources of Reven revenues one is the uh inflation the new coins that are created to reward them which in your uh graphic were displayed started out as 50 we're now as of this having down to a little over three Bitcoin miners also make revenues from transaction fees but historically the vast majority of their revenues come from inflation from the new coins uh which means that this is a significant can hit to their revenues while their costs will remain high H now what does this mean for investers I think the big question is how the Haring will impact prices uh in fact it had already been pretty volatile and lead up to the Haring event right from the highs we saw in March thanks to that spot Bitcoin ETFs uh but some analysts say that they had already priced in the Haring yeah the interesting thing about these events is because they are hardcoded into the software that runs Bitcoin we've known this was coming arguably from when Bitcoin was first launched um 15 years ago and to the extent that markets are a discounting mechanism it shouldn't be that big of a deal uh in the early years the having served as sort of a great uh PR moment for Bitcoin because the cryptocurrency was not watched by the mainstream nearly as much as it is today but whenever there was a having it would get mentioned in business Publications and the mainstream media but now that Bitcoin is a lot more widely accessible and followed uh it's not even that uh so to answer the question of what does it mean I'm not sure you did mention that previously coin but what is very unique about this having is that we had a major rally in front of it in fact Bitcoin made a new all-time high not that long ago so there's an interesting debate as to how much of all of this is priced in and whether it even matters let's talk about how Bitcoin you know could perform in the face of those higher for longer interest rate environment as well as a geopolitical uncertainty you know looking at it from a more of a long long-term uh perspective so there are two ways to think about Bitcoin uh one is the way most people think of it which is a store of value akin to digital gold something that could be a good hedge from inflation because of its limited Supply but it's important to remember that Bitcoin is also the currency of a decentralized network for payments and value transfers uh and how the price be behaves as a combination of investors expectations of the benefit of both so certainly if interest rates are higher for longer um and if the perception is that central banks are going to remain Vigilant to fight inflation then the store of value benefit of Bitcoin is well the appeal of it is diminished on the other hand as geopolitical tensions rise and their fears of more conflict possibly more economic sanctions then the other aspect of Bitcoin which is an alternative transfer mechanism might actually become more appealing and we just going back to the point on on what this means for minus and so you know you you're talking about minus profits being half our revenues definitely take a hit um this event you know is it possible to lead to more consolidation in the space as you know as you as you talked about you know the revenues being hit yes ordinarily what we expect to happen after having is that miners that are in a tougher economic situation and have a higher cost of production have a harder time leaving their machines running because they might literally not be making enough money to pay their bills leading to consolidation that should benefit stronger miners but the other interesting thing that's happened in this having it hasn't gotten a lot of attention is that in the past year uh developers have come up with alternative uses of the Bitcoin blockchain for things other than holding and moving Bitcoin these include nfts or non-fungible tokens they even include other kinds of tokens um that could possibly be stable coins Securities whatever people do with tokens as your viewers probably know other blockchains like ethereum have always had that functionality Bitcoin did not but people have figured out how to introduce nfts and other kinds of fungible tokens onto the Bitcoin blockchain but to use any of that users have to pay Bitcoin in transaction fees so actually the irony of the past couple of days since the having is that while the inflation rate has gone down the transaction fees on bitcoin have skyrocketed in part because certain new upgrades were also introduced to allow this extra kind of activity on Shain so the question now is will these new features of Bitcoin create enough additional revenues for miners in a way that could possibly offset uh the reduction of Bitcoins that're being paid as part of the protocols inflation all right Omid I really appreciate your time this morning om malikhan there ajang professor at Colombia Business School

Channel: CNA

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Length: 8min 54sec (534 seconds)

Published: Mon Apr 22 2024