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Bitcoin halving and its deflationary effect

23 August 2021 Andrew Ludwig



Click on the video link to watch the short interview with David Farelo, Head of Operations and Trading @ CURRENCY HUB.

Halvings reduce the rate at which new Bitcoins are created and, thus, reduce the available supply. This can have implications for investors who are used to prices increasing for low supply goods, such as gold. At the current halving rate, the total number of Bitcoin in circulation will reach a limit of 21 million in the year 2140, making the currency entirely finite and potentially more valuable over time.

In order for Bitcoin miners to earn Bitcoin, two things have to occur. Firstly, they must verify one megabyte of transactions, which can be as small as one transaction, but are usually several thousand depending on how much data each transaction stores.

Secondly, in order to add a block of transactions to the blockchain, miners must solve a complex computational maths problem, called a “proof of work”. This involves coming up with a 64-digit hexadecimal number, called a “hash”, that is less than or equal to the target hash. A miner’s computer will spit out hashes at different rates - megahashes per second, gigahashes per second or terahashes per second - depending on the unit, guessing all possible 64-digit numbers until they arrive at a solution.

The “difficulty level” is a relative measure of the amount of resources required to compete for mining new Bitcoin. The more miners competing for a solution, the more difficult the problem becomes and vice versa. If computational power is taken off of the network, the difficulty level will adjust downwards to make mining easier.

At the end of the day, the scarcity of the resource that is Bitcoin is determined by the number of coins in circulation and how quickly they can be mined. The process set in motion back in 2009 (by an individual or group using the alias Satoshi Nakamoto) was designed to ensure that as more Bitcoin came into circulation, the reward for mining would diminish as the price of the Bitcoin rose. The expected value would still be a motivator to extract the remaining Bitcoin, while the underlying asset would be protected from the inflationary effects other FIAT currencies would be exposed to, as more came into circulation. Hence the store of value and its perception as digital gold.

Article written by Andrew Ludwig https://www.linkedin.com/in/andrewjohnludwig/ , Head of Distribution @ CURRENCY HUB https://currencyhub.co.za/and founder of BLACK ONYX https://blackonyx.co.za/ and FUND HUB https://fundhub.co.za/.

Disclaimer: This article does not constitute financial advice. While the author and his firms are regulated by the FSCA, cryptocurrencies are not a regulated investment.  Please refer to CURRENCY HUB https://currencyhub.co.za/ a juristic representative of BLACK ONYX (FSP 47701) https://blackonyx.co.za/ for more information.

 

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