“Bitcoin” has likely become part of your normal vocabulary over the past several years. You read articles about individuals becoming wealthy overnight due to Bitcoin investments skyrocketing or see the symbol as accepted payment online or in a store. This conjures many questions about the system, including what is Bitcoin mining and what is a block reward? These questions will be answered in this article. Think of Bitcoin mining as the labour that is being performed behind-the-scenes and the associated block reward as payment for the hard work.
What is the Block Reward?
Simply put, the Bitcoin block reward is the newly-generated Bitcoins that are given to miners who successfully solve each block. Each new block is added to the blockchain, which is a ledger of all transactions that have occurred on the network. Once a block is written, it cannot be removed or altered.
How is the Block Reward Verified?
Bitcoin’s creator, Satoshi Nakamoto, created the block reward schedule when the system was invented. It is one of the central rules of the network that cannot be changed without an agreement across the entire system. When the system was first launched, the Bitcoin mining block reward was 50 Bitcoins from block #1 to 210,000 blocks. At 210,001 blocks, the block reward halves to 25 Bitcoins. With blocks being mined every 10-minutes on average and 144 blocks mined per day, it takes approximately four years to halve.
The total number of Bitcoins in circulation will 21-million, distributed to Bitcoin miners when blocks are created. Once the 21-million Bitcoins are produced, no new Bitcoins will be created, thus meeting the required circulation.
Why is the Bitcoin Mining Block Reward Important?
The block reward generated by solving complicated algorithms is the only way to create new coins within the network. It is impossible to counterfeit or bring new coins into circulation from outside the network since each coin must match the ledger. The Bitcoin mining block reward incentivizes miners to add computing power to the network.
The most popular mining option is ASIC which is expensive and carries a high electricity cost but is faster and yields higher rewards. This is because ASIC is specifically for Bitcoin mining and do not have any other purpose. The financial goal of a miner is to have hardware and electricity costs of mining a single Bitcoin be lower than the price of one Bitcoin.
The greater the computational power a miner has, the higher probability of mining a block and gaining a block reward. Many miners work in pools since the collective power of many can yield greater rewards. As miners continuously add more power to the network, the security increases. The block reward essentially acts as funding for the miners to secure the network through power.
When the Block Reward Becomes Small, What Happens to the Miners?
When a transaction is sent across the network, Bitcoin users must pay a fee. Currently, there is not a staggering number of Bitcoin users but those fees will eventually become large to cover the cost of the decreasing reward. Nakamoto stated that in a few years when the reward becomes too small, the transaction fee will become the new compensation for the miners. Therefore, the prediction is that in 20-years, the system will experience large transaction volumes or no volume at all.
Is the 21 Million Bitcoin Block Reward a Steadfast Rule?
The 21 million Bitcoin limit is a rule that was mathematically derived but is not a precise figure. With the last projected Bitcoin being mined on October 8th, 2140, the total supply of Bitcoins will be slightly lower than the limit rule. Bitcoins can be rendered un-spendable with the simplest way being that the private key is lost. Also, Bitcoins are destroyed when sending them to an invalid address. These two situations remove coins from the network.
There is nothing within the system rules that precludes engineering a fractional-reserve system on top of the current network, like bank reserves. Also, in theory, there could be a soft or hard fork that changes some of the rules.
This is important concerning the deflationary position of Bitcoin, which is maintained by halving every four years. Assuming the miners can trust Bitcoin to maintain deflationary economics, you must believe that the chain cannot be coerced, and the Bitcoin community will live by the technical principles of the system.
How Does Halving Impact Price?
Unfortunately, it is not possible to understand whether the reward halving impacts Bitcoin’s price. Like all commodities, Bitcoin follows the same economic rules: a decrease in supply with a stead demand equates to a higher price. The main difference compared to other currencies is the block reward halving schedule is public. That means miners and users know when the rewards will halve so the price may not be impacted during halving.
The first halving, when 210,001 blocks were reached, occurred on November 28th, 2012. This decreased the reward from 50 coins to 25 coins per block. Early the following year, the Bitcoin price increased and then saw a drastic increase at the end of 2013. It is not possible to say whether the price increase was due to block reward halving or other factors.
Halving day in 2012 did not see an immediate considerable price movement until almost a year later. However, halving day in 2016 significantly moved markets that shocked the world. While the 2012 halving day ascended the price from $11 to $1,000 a year later, the price crashed back to a few hundred dollars shortly after.
Not long after the 2016 halving day, in 2017, Bitcoin hit an all-time high of $20,000 per coin which gained the attention of the entire world. Markets went crazy and the skeptics were more convinced. It was at this point that the term “Bitcoin” became a more household name. Logic dictates that there is a direct relationship between halving and the price but there is no actual proof.
How Does Having Impact Miners?
Given the equation, it halves miners’ earnings every four years. That means, miners from blocks 1 through 210,000 made more per block than miners starting at block 210,001 by double. However, since the halving schedule can pretty much be estimated to the day, miners consider reward halving before they occur.
Also, the halving process decreases supply which is estimated to cause the price of one Bitcoin to increase. This increase often offsets the block reward halving because each coin becomes rarer and, therefore, more valuable.
Previous halving days have shown a significant decrease in the computation power added to the network by miners since they will shortly be disincentivized to find new blocks. However, modern Bitcoin miners anticipate this situation since they are mostly sophisticated organizations and corporations, instead of individuals using a spare GPU. In the coming years, as halving continues, there is a higher probability that the corresponding power decrease will not be as significant since investments have been made to the mining infrastructure to anticipate the halving date.