Around every 4 years the block reward for Bitcoin is halved. How does this affect the value and price of Bitcoin? And what is the easiest and safest way to buy BTC?
If you prefer to watch the explanations in a video, then have a look here:
Let’s start from the beginning:
Mining:
Mining is one of the most misunderstood things in the world of crypto currencies. Most people believe that mining is a process in which a crypto currency is created. But this is mostly wrong.
What is Mining?
Mining is a process in a decentralized system to create consensus.
What is Consensus?
Consensus means agreement and is the agreement about what has happened and what has not. In a centralized system, this is done by the central institution – with all its advantages and disadvantages. In a decentralized system, the community decides. In order to avoid disagreements, “mining” is used as one of the possibilities.
Proof of Work
Proof of Work is the oldest and most used of all. Most crypto currencies use it because it has not only been extensively tested in recent years, but also because it is the most resistant. Rather than proving importance or staking coins, this consensus requires proof that work has been done. Whoever has done the work first can be the first to choose the transaction composition and also gets the mining reward. This consists of all transaction fees of the period (block) plus additional payouts, which are different for each crypto currency. In the case of Bitcoin, for example, this incentive is 12.5 Bitcoin per block (period).
Halving
At the very beginning, 50 bitcoins per block were given to its finder. Every 210,000 blocks, which take about four years to complete, are halved, which means that the block reward is halved. When Bitcoin started in 2009, it was the aforementioned 50 bitcoins, in 2012 it became 25 bitcoins, and since 2016 we only have 12.5 bitcoins per block. This halving happens a total of 64 times until the Mining Reward reaches the smallest possible unit: a Satoshi that cannot be halved any further. Theoretically, the very last Satoshi is poured out in the year 2140, but depending on the speed of mining, this can happen a bit earlier. From then on, miners “only” receive the transaction fees as mining reward and no additional bitcoins. In the case of Bitcoin, almost 21 million bitcoins are created in this way and distributed more or less fairly across the network.
2016 was the last halving when 25 bitcoins were reduced to 12.5 bitcoins as a reward. 2020 now nearly 210.000 blocks after that the next halving will take place in May 2020 and so the reward will be reduced from 12.5 bitcoins to 6.25.
Impact
Halving the rewards will create artificial inflation, so to speak; halving the rewards will mean that fewer new bitcoins will flow into the system and therefore lower inflation. Now you might think that this would be unfair to the miners because they will get fewer rewards. However, Satoshi has anticipated this and also expected the Bitcoin price to rise and rise and therefore the rewards will also have more and more value.
In the past, halving has had an extremely positive effect on the price – it has always gone up. However, up til now “only” 2 halvings have taken place and therefore it is difficult to fix it on the past.
If you look in all crypto forums or listen to the YouTubers, everyone is extremely bullish about the halving and expects a bull run.
5 easy steps how to buy bitcoins
A warning in advance: there are unfortunately many people and companies who offer rip-offs and scams in the world of cryptocurrencies and entice people to invest their hard-earned money in some get-quick-rich-schemes. So always be especially careful when people suggest an investment under pressure or promise you apparently low-risk returns.
Step 1: Select amount of capital and time
There is no right or wrong for this, but everyone must answer these questions for themselves. Personally I think that 1-10% of one’s liquid capital is a good amount to invest. So if you have $10.000 on your side, for example $500 make sense. Why? In the unlikely event that it’s all gone, you’ll be upset, but it’s not the end of the world. However, if the $500 turns into $50.000, then you are guaranteed to be happy. But the reality will be somewhere between these two scenarios.
Nobody knows the right time. That’s why I recommend that you either halve or even divide your investment by three and invest in two or three tranches. You then invest, for example, 2 × $250 over a period of time. Never fall behind the market, but rather wait a bit before buying until the market goes down. In the crypto industry we call this FOMO – Fear of Missing Out. Be careful not to fall for this fear of missing out.
Step 2: Get Dollars on a swap meet
In the second step, we now select a suitable exchange. Please make sure that the exchange is reputable and charges as low fees as possible. Theoretically, you have a huge number of options, but I can recommend the following two options from my own experience:
Coinbase, if you like to pay by credit card: bit.ly/exchange_promo
Kraken, if you prefer bank transfers: www.kraken.com
The procedure for all three is always the same: You transfer your Fiat money either by credit card or bank transfer to your account and have the same amount of Euros in your account.
Step 3: Exchange Dollars for Bitcoin
Now you exchange your Euro into bitcoins via the platform. This works differently depending on the platform, but should be relatively intuitive. I recommend that you buy the first 50% of your capital that you are willing to invest in crypto at market price.
For the other 50%, I would give myself a time frame when I would reinvest it. Either after 1-2 weeks, 1-2 months, or when you see that the Bitcoin has fallen sharply.
Step 3.1: Exchange Bitcoin for Altcoins
Altcoins (alternative digital asset) is everything that is not Bitcoin in the crypto world. They often have different characteristics and some of them have completely different applications. However, most of them are still at the beginning and are very uncertain how to proceed.
2017-2018 there was an extreme boom in the use of Altcoins. Some of them made several 100x within a few weeks or even days. As fast as the rise came, so did the crash of most of the Altcoins. Some investors are partly more than 95% with their capital in the minus. That means, if you invested $500, you have only coins of the amount $26 left over!
I don’t want to scare you off, I just want to prepare you so that you don’t end up in FOMO.
If you are well-informed, here are the instructions for exchanging bitcoins for Altcoins:
Most of these platforms have only a limited number of options for different cryptocurrencies, so-called coins. The exchange I used to get access to almost all cryptocurrencies is the following: http://bit.ly/binance.com
All these file sharing services are free to register. You just transfer a cryptocurrency there and exchange it for another one.
Step 4: Keep cryptocurrencies safe
However, exchanges have a huge disadvantage: you do not control your coins yourself, but trust the exchange. So if it gets hacked or goes bankrupt, your money is probably gone. This is exactly why I recommend that you secure your bitcoins or other cryptocurrencies with a hardwallet and control it yourself. The model I personally use for this is the following: www.julianhosp.com/hardwallet
Step 5: Be #CRYPTOFIT
The blockchain world is relatively new and therefore you quickly run the risk of investing in scams.
Furthermore, as with all asset classes, it is very important to be well-informed. My ability is to explain things in a simple and easy way to understand.
That is why my book “Cryptocurrencies simply explained” is so popular https://geni.us/crypto_simple
I’m looking forward to seeing you!
Your Julian