Bitcoin has a capped maximum supply of 21 million coins and its network is secured by miners. The miners are specialized hardware that uses a consensus mechanism called “proof of work” to verify each block of bitcoin transactions. Miners are rewarded when they ‘find’ a block with the newly-created bitcoins. This is called the block reward and this is how new bitcoins are released into the system.
A new block filled with transactions is added to the Bitcoin blockchain approximately every 10 minutes and the miner that verifies each block receives the block reward. The current block reward is 12.5 bitcoins per block. On average, 144 blocks are mined per day. 12.5 new bitcoins are generated with each block. This gives an approximate of 1,800 new bitcoins mined per day.
The number of new bitcoins that are created via the block reward is reduced by half every 210,000 blocks, approximately four years. This is known as the Bitcoin Halving. In 2009 the Bitcoin mining rewards started at 50 BTC per block. On 28th November 2012, the first Bitcoin halving took place to reduce the mining rewards to 25 BTC. On the 9th of July 2016, the second halving took mining reward down to 12.5 BTC. The next halving will be the third halving, which is expected to happen on the 4th of May 2020. At that time the block reward of 12.5 bitcoins will be reduced by half, to 6.25 bitcoins.
Each halving reduces the rate of new Bitcoin entering into the supply until no more new Bitcoins are created at all in the year 2140. In 2140 the 64th and last Halving occurs and no new Bitcoin will ever be created. This process was coded in Bitcoin’s code by its creator, Satoshi Nakamoto. This mechanism is reducing the total supply over time.
How will the halving affect miners?
The main source of income for a miner is the block reward that you get when you ‘find’ a block. The amount of Bitcoin that is mined in that block could then be sold for fiat currency. This means that the actual profitability of a miner is highly dependent on the price of Bitcoin and how many Bitcoins are mined. The mining process has some costs for miners, like the hardware cost and the electricity cost. So when the halving occurs a miner would earn 50% fewer Bitcoins per mined block, while the costs remain largely the same. So in order to offset this and keep the same profitability the price of Bitcoin would need to double.
This is most noticeable when looking at the minimum price of Bitcoin that is needed for mining viability — the price for a miner to make back all the costs including the purchase of machines. This minimum price will now increase significantly, in itself this does not have to be a bad thing, but it is something that needs to be taken into account should the price of Bitcoin decrease. If the price of Bitcoin falls under the minimum price for a miner to be profitable that miner will shut off the machine, and when that happens the network difficulty will drop.
According to the laws of demand and supply, the scarcity of the Bitcoin supply will lead to an increase in Bitcoin demand, leading to a rise in prices. But this is only in theory, and no one can predict when this will happen. What the miners can do is stay ahead of the problem and find various ways to deploy the most efficient mining hardware and have low electricity prices.
Elite Mining takes these future events into account by making sure to get good deals on equipment and very low electricity costs. This helps keep the minimum price of Bitcoin that EMI needs remarkably low, therefore making us extremely competitive.
Written and researched by Erald Cipi from the EMI R&D department.