On July 9th, the block reward for Bitcoin mining halved from 25 BTC to 12.5 BTC. That marked the second time in history a halving occurred.

What is Bitcoin and how does the halving work? The technical answer is that Bitcoin is a protocol or free and open source software code that has electronic cash as its most important application. Bitcoin is the first peer-to-peer, decentralized digital currency-also the first successful cryptocurrency, using cryptography to secure transactions and regulate the supply of units.

Bitcoins are mined into existence. Mining is a verification process that adds blocks to the blockchain, a record of the history of transactions. The whole mining process can be described as following. New transactions are broadcast to the network. Miners collect new transactions into a block. Miners try to find a nonce that solves the partial hash inversion problem for their block. Upon finding a nonce that solves the problem, the miner broadcasts the proof-of-work to all nodes in the network. Receiving nodes verify the transactions of the broadcasting node and accept only if all are valid. Nodes express acceptance of the block by incorporating the hash of the block to use for working to solve the next block.

Mining was a craze in the early days. The original block reward as programmed in the Bitcoin protocol was 50 BTC per block. It is regulated by the code to halve about every 4 years until the total supply reaches 21 million. The last bitcoin is scheduled to be mined in 2140. In theory, as the block reward lessens, miners will be increasingly reliant on transaction fees as earnings. As time increases and the block reward decreases, miners will have the incentive to prioritize transactions with greater fees to those with the minimum.

Many events have happened around the halving. From May to June, the price of bitcoin skyrocketed from around $450 to a high of $768 before settling down into a range around $650. Some people theorized the rise was caused by Chinese investors spooked by continual yuan devaluation finally exiting the unpromising Shanghai stock market. Others thought it was heavy-volume speculation in anticipation of the halving. The interesting thing is that after the halving happened, the price did not explode but remained relatively stable.

What effect will the halving have on the Bitcoin economy? First, miners that are struggling or barely profitable will upgrade equipment or shut down. Second, a decrease in number of miners could incentivize people to create a new generation of mining machines and participate in mining to seek profits. Third, fees might increase a bit in order for transactions to be confirmed. Fourth, since halving is deflationary and theoretically supports bitcoin's price, inflationary stimulus by the Bank of Japan could spur Japanese investors to buy more bitcoin.

Finally, the halving as a historic event has brought considerable media attention to Bitcoin. That is good because more people learning about Bitcoin means more portfolio diversification as well as more understanding of an alternative financial system without arbitrary monetary policy or bank fees and regulations.

The author does not hold any positions in BTC.