Why is There a Bitcoin Halving Mechanism?

Aynsley Moore

Aug 27, 2021

Principles of market supply and demand. The Bitcoin halving follows the supply and demand relationship of the economic market, ensuring that the value of Bitcoin will not be diluted due to excessive circulation. The price of Bitcoin has risen tens of thousands of times since its inception because the long-term demand is increasing while the long-term supply shrinking. The halving will lead to a substantial change in the relationship between supply and demand. There are 144 blocks, and each block reduces the supply of 6.25 Bitcoins on average 24 hours, which means that the supply of 900 Bitcoins per day is reduced and nearly 330,000 per year. As a deflationary asset, after 21 million limited Bitcoins are mined, mining rewards will approach zero. If the Bitcoin issuance speed is too fast and there is no circulation limit, a large number of Bitcoins will be issued and circulated in the market, which will lead to a significant depreciation of Bitcoin.

To curb inflation. When the economic downturn is severe, banks often issue large amounts of legal tender to solve short-term financing needs which will cause rapid currency depreciation. Vitalik Buterin, the founder of Ethereum, once explained the necessity of slowing down Bitcoin issuance through mining. Controlling the issuance of 21 million Bitcoins can prevent currency depreciation caused by large-scale issuance and curb inflation. American investor Paul Tudor Jones said that the development of Bitcoin reminded him of gold in the 1970s. During the COVID-19 epidemic, Bitcoin may become the best hedge against inflation.

The development of Bitcoin vividly shows what is “When a thing is scarce, it is precious.” Through the finiteness and scarcity of the stock, the value of Bitcoin is guaranteed. The initial issuance mechanism of Bitcoin is like consuming resources to mine gold and inject it into circulation. Every gram of gold is mined, and the difficulty of mining the remaining gold will increase correspondingly. Unlike gold, Bitcoin does not rely on a physical supply chain. Its scarcity is controlled by globally distributed network nodes and miners. Miners devote resources to process transactions on the network, and mine Bitcoin at the cost of time and labor. On the premise that the total amount remains the same, finiteness and scarcity make Bitcoin appear more “precious”.


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