Everything You Need to Know About Bitcoin’s ‘Halving'

Will it be a disaster or a boon for bitcoin?

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Jul 8 2016, 12:00pm

Image: Flickr/anokarina

On Saturday, bitcoin is expected to reach a landmark known as the "halving," and the community is split on what the outcome will be. Some believe that the currency's value will skyrocket, and others think that the change will cause it to tank.

Sounds pretty extreme, right? Well, yes, but this is bitcoin we're talking about. If people weren't absolutely losing it over something or other, I would be concerned.

But let's back up a bit—what is the halving?

Much of bitcoin's economic reality is dictated by code, written years ago, that is now executing itself. For example, the difficulty of solving math problems in order to receive a reward of newly minted bitcoins—a process known as "mining" blocks to add to the blockchain, a public ledger of every bitcoin transaction—increases over time to account for increasing hardware speed, and to keep everything on an even keel.

Members of the community fear that the change could shake up the mining landscape

The halving, which happened once before in 2012, is a similarly planned change. Every four years, the reward that miners receive for solving blocks is cut in half, effectively reducing the rate and number of new bitcoins introduced into the economy. Right now, that reward is 25 bitcoins per block, or roughly $15,000 USD. On Saturday, that number is expected to drop to 12.5 bitcoins, or roughly $7,000 USD.

The reasoning behind the halving, which arrives automatically once a certain number of the total amount of bitcoins—estimated at 21 million—are mined, is that bitcoin simulates a commodity like gold more than fiat money. While governments can print as much money as they want, causing inflation, there's only so much gold in the ground and its value is dictated in part by how much of it is out in the world. The idea is that, like gold, bitcoin will retain value if it maintains a controlled supply.

So, what's expected to happen after the halving?

With miners making half as much money as they used to overnight, certain members of the community fear that the change could shake up the mining landscape, knocking miners off the network. Some may no longer be able to afford to keep the lights on. Brian Armstrong, CEO of bitcoin company Coinbase, estimated in March that a worst-case scenario would see 50 percent of mining power drop off the network.

Others believe that the halving, which is a planned milestone that everyone has seen coming for years, marks a positive moment. After all, bitcoin made it all the way to its second halving without totally collapsing. Given all the massive hacks, thefts, scams, and high-profile crackdowns that bitcoin has been a party to since its inception in 2009, this is legitimately impressive. Thus, a number of observers believe that bitcoin's value will actually rise, thanks to a bullish speculation market.

The halving signals a shift to an economy that relies on regular users paying a fee to miners

If the last halving is any indication, then the second camp may be correct. On that "halving day," the price of one bitcoin was $12.25 USD. Ten days later, it rose to $13.43. Basically, a meaningless bump: nothing changed, price-wise.

More than anything, the halving signals yet one more shift away from an economy that relies on automated block rewards to one that relies on regular users spending bitcoin on, say, dinner, to pay a fee for miners to include their transaction in a block sooner, thus confirming it. Without a big reward for solving a block, the incentive for miners to do their jobs changes from collecting newly minted coins to user fees.

This change speaks to a core disagreement within bitcoin that has cut across numerous debates, including the heated argument over the size of blocks containing transaction data: is bitcoin a payment system for groceries and coffee, or is it a settlement layer for established financial services? As I mentioned in a piece on the block size debate in March, if I buy my morning coffee with loose change instead of bitcoin, I don't have to spend an extra couple cents (or more) just to confirm the transaction.

While the halving on Saturday will in all likelihood have minimal effects on bitcoin's price, it's one more push in a direction that some users are reluctant to follow.

But you can't argue with code.