Bitcoin has been on a wild ride.
Already over the past year, Craig Wright stepped forward as Satoshi Nakamoto, bitcoin’s anonymous founder, but later backed away from those claims; a civil war raged at the upper echelons of the bitcoin community over changes to the network’s code; a renowned bitcoin developer wrote a eulogy for the cryptocurrency; and another virtual currency, ethereum, exploded in popularity.
Against this backdrop, the price of bitcoin has nearly tripled.
It’s nearly impossible to say why bitcoin has done so well. But as an asset not directly tied to a single economy, it tends to attract investors when there’s a lot of volatility. There’s certainly been no shortage of that.
Now, a looming event expected around July 9th, known as “the halving,” could rattle the entire bitcoin system—its price, its stability, and its future.
What’s going on?
Before we get started, we should go over how bitcoin works. Bitcoin is a digital currency that lets two people enter into a financial transaction without any middlemen. While simple to use, the technology is loaded with checks and balances to eliminate fraud.
One of the keys to preventing fraud is the process of mining. Bitcoin transactions are stored on something called a “block.” If the bitcoin network is essentially a massive accounting book, then the blocks are its pages. Each block can store 1 megabyte of data, and it’s the miners’ job to confirm the authenticity of the transactions contained in the block. The miners do that by taking each transaction’s corresponding data and using it to complete a math problem. The solution is known as a “hash”—a shorter unique string of digits that has all the important transaction information within the block. Once completed, the hash ties back to the last block, which is how bitcoin creates a permanent, unalterable transaction record. (Changing one hash would require changing everyone else’s ledger in the bitcoin system.) Importantly, as more computing power is added to the system, the problems become more complex.
Miners don’t do this for fun, of course—every time a miner completes a block, it earns bitcoins as a reward. Right now, miners earn 25 bitcoins per block, which is about $16,000. Completing a block is the only way for new bitcoin to come into circulation.
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