Bitcoin mining and halving day: Let's dig into it

09/22/2021 | 11:44am

You have most certainly heard of it - if you are interested in the world of cryptocurrency assets. Mining is intimately linked to the functioning of the public digital registry: the inevitable blockchain. Here we are not talking about a miner using his pickaxe to extract precious metals, but about the bitcoin miner, equipped with his super-powerful computer, allowing him to solve complex mathematical calculations and get paid in bitcoin. You might be wondering who these miners are. Well, it could be you, me, individuals, or companies. The system is designed so that everyone can be a miner and contribute to the development of the blockchain. Let's go and discover bitcoin mining and its relationship with halving day.

Bitcoin mining consists in validating the transactions of this cryptocurrency and recording them on the blockchain. The process used, called "Proof of work", is fundamental to the Bitcoin philosophy, as it secures the system and ensures that all users act correctly.

The Bitcoin miner provides the computing power of his computer equipment, which will solve the mathematical problems to validate the transactions. By performing this operation, the blockchain takes on the role of a trusted third party. Let's take an example to illustrate this process. When you send money from your bank account to another bank account, it is the bank that plays the role of the trusted third party. In the blockchain system, it is this technology that takes on this role - through miners validating the transaction. Let's now take a look at how a transaction is entered into the blockchain.

First of all, a bitcoin transaction occurs between two users. This transaction will be directly integrated into a block which will be verified by the miners in order to attest its validity. The transaction will be added to other transactions in a block until it contains a maximum of 1MB of transactions (the average time to fill a block is 10 minutes). Then the miners, using their super-powerful equipment, will solve the "hash" (mathematical function) by searching for and finding the solution to the complex mathematical problem to validate the block. Finally, the new block is added to the blockchain and thus spread throughout the network. By validating this block, the miners are paid in bitcoins.

Now you have to ask yourself to what extent the miners are paid. We will not discuss whether it is profitable to mine bitcoin, because to do so you have to take into account different factors such as the cost of the hardware and its consumption, the average cost of electricity and the hash rate of bitcoin. This will be the subject of a future article. Here we will present how miners are paid.

As you can see, miners are paid for solving cryptographic puzzles by adding a new block to the blockchain. The first miners could receive 50 bitcoins per block, but this offer is reduced by half every 210,000 new blocks (every 4 years or so). This is called bitcoin halving. The last bitcoin halving took place on May 11, 2020, reducing the reward from 12.5 bitcoins per block to 6.25 bitcoins per block. Thus miners see their amount of bitcoin reward reduced over time. This scheme will allow the maximum number of bitcoin in circulation to be reached by 2140, a number of 21 million units as originally planned by the anonymous creator(s) of bitcoin, Satoshi Nakamoto. Note that, miners also receive part of their remuneration from the transaction fees paid by users.

You may think that the decrease in the amount of bitcoins distributed to miners leads to a drop in efforts on mining. But the increase in bitcoin price over time compensates this.

Let's take an example:

Bitcoin on January 1, 2012 is worth $5.30 with a distribution of 50 bitcoins per block.

Calculation: 50 x $5.30 = $265

Bitcoin on January 1, 2021 is worth $30,000 with a distribution of 6.25 bitcoins per block.

Calculation: 6.25 x $30,000 = $187,500

These figures do not include the cost of mining, price fluctuation and the hash rate of bitcoin.

You may wonder if bitcoin halving, the famous reduction of bitcoin distributed to miners, has any influence on the bitcoin price. Nothing better than a graph to visualize its effects:

Source: ProRealTime

The halving of the amount of new bitcoins generated per block as a result of bitcoin halving, has had a considerable accelerating effect on the price of the king of cryptos in the past. This is because in traditional markets, if supply decreases but demand remains stable, prices rise. During the reduction of new bitcoins created as a result of bitcoin halving, prices have tended to rise sharply. The price increase following bitcoin halving in 2012 and 2016 resulted in an acceleration of several thousand percent. It is too early to draw conclusions about the one in 2020. We must also remember that what happened in the past will not necessarily happen again in the future.

We have seen how the "Proof of Work" protocol works for bitcoin mining, the relationship of bitcoin halving with the miners' remuneration as well as the repercussion of this phenomenon on the digital currency's prices. The bitcoin miner is not so different from the precious metal miner. Only the modern miner does not use his pickaxe as hardware but the power offered by computers to obtain fragments of digital currency. We will devote an article to the alternatives of the "Proof of work" protocol (which raises many debates on the energy issue in particular) operating with a different remuneration system.

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