When it comes to cryptocurrency, many things contribute to a cryptocurrency’s functioning and longevity. However, one mechanism that is perhaps most crucial to Bitcoin’s function is the block reward. Block rewards incentivize miners; help control when new bitcoins enter circulation, and ultimately power the entire bitcoin network. In this article, we will break down what Bitcoin block rewards are, how they work, and their significance for the future of cryptocurrency.
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Block Rewards Explained
So, what the hell is a block reward anyway? On the surface, it’s pretty simple, once you get past the jargon. Each time miners confirm a batch of Bitcoin transactions (otherwise known as a “block”), they are paid in two ways:
- New bitcoins that did not exist until that moment.
- The transaction fees that people include with their transactions.
It’s Bitcoin’s ingenious way of compensating those who keep its network operational while controlling how new coins enter circulation. Pure genius when you think about it.
The Halving: Why Bitcoin Is Obsessed with Scarcity
Now, this is where it starts to get truly compelling (and where I jumped in and started investing). The process of Bitcoin is such that the reward for mining is automatically cut in half every four years:
- Between 2009 and 2012, miners received 50 bitcoins for each block
- Between 2012 and 2016, the reward was cut down to 25 bitcoins
- Between 2016 and 2020, it was once again halved to 12.5
- Between 2020 and 2024, it’s at 6.25
- After 2024, it will go down to 3.125
So, with each halving, the flow of coins that enter the market slows down, creating scarcity and, theoretically, price impact.
Why You Should Give a Damn About Block Rewards
Trust me: Block rewards matter for some reasons that really affect your wallet.
They are Bitcoin’s security budget. Miners pay through their noses for equipment and electricity, but block rewards at least cover these costs. As Bitcoin grows more valuable, they will spend more on keeping it secure virtuous cycle of security that the traditional banking system cannot provide.
Block rewards also guard against Bitcoin being inflated to worthlessness like the dollar. Governments can print as much money as they please at will; Bitcoin’s core protocol limits supply to 21 million ever. The halving schedule dictates that we get there slowly; thus, until 2140.
This steady supply was the rational reason that I, in 2019, decided to put 20% of my savings into Bitcoin best financial decision I’ve ever made.
Here Are the Million-Dollar Questions
With rewards ever shrinking, two biggies loom large:
- Will it be profitable to mine Bitcoins as the rewards become smaller? Eventually, transaction fees will be the main source of income for miners. Whether transaction fees become substantial depends on the increase in Bitcoin’s value, the number of daily users of Bitcoins, and the advancement in mining technologies. My techie friends are betting heavily on breakthroughs in mining efficiency.
- Will the network be secure enough thereafter all rewards are gone? By 2140, all 21 million bitcoins will be mined, and miners will be earning a living on transaction fees. Is this enough incentive? Most experts I met at conferences believe that it’s only if Bitcoin succeeds in the long term that transaction fees will be worth fighting for.
The Brilliance of Bitcoin’s Design
What amazes me is how Bitcoin’s reward system ties security to money creation. It created digital scarcity – this was impossible before Bitcoin came along.
It’s like gold but better. Gold has value after thousands of years because it is scarce. It creates the same scarcity as gold but in a way that is 100% predictable, without Bitcoins needing to be physically stored.
The Future
I have been stocking up with the halving just around the corner in 2024. Historically, halvings have set off bull runs, but, as my financial advisor added, past performance is not guaranteed.
Whether you are mining in your garage like Dave, my neighbour, investing, or just curious about the future of money, knowing how block rewards work gives you a head start on a better understanding of how Bitcoin works.
In a world where governments create trillions of dollars with the push of a button, Bitcoin’s system, which is transparent and predictable, is different. That’s why I am all in.
The block reward system is more than clever technology, it is a financial revolution that is just beginning.
