Bitcoin was designed as an alternative to fiat currency, boasting a number of unique characteristics such as its finite supply.

At the time of writing, the price of Bitcoin stands at a 2 year high and though there are a number of theories as to why demand is increasing, the timing is in line with the upcoming halving, where we will witness Bitcoin’s deflationary nature in action, regulating the amount that will be produced.

To fully understand how the halving, or as it has been dubbed “The halvening” works, you first have to understand how new bitcoin are created. Whereas more conventional, fiat currencies are issued by a governing body, Bitcoin is decentralized with no issuer. Instead, transactions and balances are recorded on a public ledger known as the blockchain.

Maintaining a ledger which adds in excess of 100,000 transactions a day without a central authority is no small feat and is a task undertaken by “miners”, these people add enormous amounts of computing power to the network to solve complex math problems which verify that transactions bundled together into blocks are valid. In exchange for securing the network, miners are rewarded with newly created bitcoin as well as the small fees included with each transaction.

To control the supply, the amount of bitcoin that miners is regulated every 210,000 blocks which is approximately every 4 years. When Bitcoin was launched, the reward fee for mining a block was 50 bitcoins, this halved on November 28th, 2012 after block 210,000 was mined and sometime next month when the 420,000th block is mined it will again half, with blocks mined resulting in a reward of 12.5. This will continue until all 21 million bitcoin have been mined and at this point, the incentive for mining will be based purely on transaction fees alone.

Ultimately, this means that new bitcoin will become scarcer with production more expensive. The basics of supply and demand indicate that if demand for bitcoin were to stay the same, the price should in theory increase, however some economists do not agree and criticize deflationary currency suggesting that saving, rather than spending does not add value to an economy.

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Source: Coinjournal.net