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The Bitcoin Halvening! Party Like It's Block 420,000

Get ready for the the Bitcoin Halvening this Saturday!  While bitcoin's inflation rate change is controlled by only a few lines of code, it's effects are massive.

And on Saturday, that rate will fall dramatically after an event called “the halving.” Some say the event, which will cut the rate at which new bitcoins are created in half, could cause the price to spike or network security to flounder.

Here’s what you should know:

What is the halving?

Satoshi Nakamoto, the name of the bitcoin creator, intended for the supply of bitcoin to be inherently deflationary (similar to gold), contrasting sharply with the policies of Central Banks, which can, in theory, print a limitless supply of new currency. The idea of a computer controlling the money supply in a transparent and predictable fashion was one famously advocated by economist Milton Friedman.

Satoshi he created a mechanism for gradually reducing the supply of new coins created, and wrote it into the underlying bitcoin software.

This is how bitcoins are created: Miners process transactions on the network by using powerful computers to solve complex cryptographic puzzles that bundle transactions into blocks, which are then stored on the blockchain — the supposedly immutable record of every bitcoin transaction. These computers lend the network the computing power it needs to function.

Miners race to be the first to solve these puzzles. The winner is rewarded with a cache of new bitcoins. This process repeats about every 10 minutes, on average. The time allotted for mining a single block can vary dramatically based on luck.

Miners can hold on to these bitcoins, or turn around and sell them on the open market. Either way, this is the mechanism through which new coins are introduced into the bitcoin ecosystem.

The halving is expected to take place Saturday around 11 a.m. Eastern, when the 420,000th block is mined. The miner who successfully fuses the prior block to the blockchain will be rewarded with 12.5 bitcoins, while the miner who processes the 419,999th block will earn 25.

What’s the price forecast?

Some have attributed the runup in the price of a coin so far this year to anticipation of the halving. The main factor on price will be how many of the 3,600 coins being created daily are being sold on the market to sustain miner's operations. If most are being sold on the market, then the halving could cut that supply in half and lead to a surge in price.

Miners’ margins come under pressure

After the halving, miners will effectively be paid half as much (assuming the bitcoin price remains constant) for expending the same amount of energy. 

If there isn’t an increase in the price of bitcoin, miners with the thinnest margins could struggle, possibly forcing some to turn off their equipment. Miners margins, however, may have already been padded as the bitcoin price has almost doubled in 2016. 

This risks centralizing more control to some of the biggest miners, who have the largest economies of scale, which could further compromise the ideal of bitcoin being a decentralized network. A recent story in the New York Times examined how a handful of large miners in China have effectively assumed majority control of the network.

Some small miners might be able to survive if they have lower operating costs — like cheaper electricity or can plug into an existing datacenter. The impact of the halving isn’t based on size, it’s based on marginal profitability.

There are some cases where a small miner running his or her operation out of an apartment building where the landlord pays for tenants’ electricity could have lower operating costs than a massive miner somewhere else.

Either way it is a good sign that new large mining operations are entering the market. Cybersecurity entrepreneur John McAfee just announced a massive new mining operating in central Washington that will take advantage of cheap hydro-electric energy in the area. This provides evidence that miners are currently profitable and they won't be shutting down miners after the Halvening reduces their productivity by half. 

The true consequences on Bitcoin's security and price may not be known until months after. An optimistic sign is that in 2013, after the December 2012 halving, the price of bitcoin skyrocketed from $10 at the start of the year to over $1000 by the end. 

If you are in Las Vegas on Saturday July 9th come by Rustica Pizzeria for the Las Vegas Bitcoin Halvening party with special guest Andreas Antonopolous!