Bitcoin halving is approaching fast. It’s scheduled for May 2020. That is just under 110 days. Halving is when block reward for mining a block reduces to half. This happens every 4 years and it has a mega affect on the over-all economics of Bitcoin. Let me explain.
Roughly every 10 minutes, a Bitcoin block is mined. The miner or the pool of miners that mine the Block, a process needed to protect the Bitcoin network and confirm pending transactions, get rewarded for mining the block. At inception, this reward was set to 50 Bitcoins per block. 50 Bitcoins were given away as a reward to miner every 10 minutes. This reward reduces to half every 4 years. Right now it’s 12.5 Bitcoins per block. This reward will reduce to 6.25 Bitcoins per block in about 100 days.
How does halving affect Bitcoin? What is it’s significance? At the time of writing, an average miner spends approximately $5,000 in hardware and utilities to mine 1 single Bitcoin. The miner is then able to sell this Bitcoin at a premium in open market at about $8,300 which is what the Bitcoin is worth right now.
Almost always the open market rate is higher than the miner’s cost. If the open market rate gets lower at some point, the miners will not be able to protect the Bitcoin network and confirm transactions profitably. Which means some of the miners will discontinue their operations at that point. But the miners are also likely to stop selling Bitcoins below the cost hence miners in a way set the floor pricing for Bitcoin as well.
As the block reward halving happens in the coming weeks, the cost to mine 1 bitcoin will instantly jump from $5,000 to $10,000. As that happens, the open market rate is likely to float above the cost of mining. Add premium to that and we could see Bitcoin trading consistently above $10,000 may be even $15,000.
However, if the open market price is unable to catch up, some of the miners will withdraw operations to cut losses reducing mining difficulty, and pulling the price further down.