It's crucial to maintain perspective among the hype around the Bitcoin halving and its impact on the price of bitcoin {{BTC}}. Most of the world ignores the halving. This is a simple change in how much bitcoin processors get paid. Credit card, Venmo, and phone payments all require processing.
A massive network of “miners” validates and records bitcoin transactions on the blockchain. Currently, these miners receive a block reward from the bitcoin network and a network transaction fee from the transaction maker in bitcoin. The “halving” halves the first reward. Nothing shocking here. The halving is predefined and regulates bitcoin supply until 21 million are produced. Current trends indicate that the block reward for bitcoin payments will halve until it reaches 0 in the next century
However, the block reward decrease significantly affects the network transaction fee. Increased transaction fees remind us that bitcoin is constrained by design. After 21 million bitcoins are released as block rewards, no one can produce more or change the supply, as governments do with fiat currency.
This is why some call bitcoin “digital gold.” Not a horrible comparison, but two key differences: Initial bitcoin supply is 21 million. Gold's supply is finite but unknown. Who knows what massive gold reserves will be found tomorrow? Two, bitcoin is infinitely divisible. People will trade satoshis (100 million in one bitcoin) as it gains value. Gold can't be subdivided infinitely as it appreciates, but new digital gold entrants are trying to make it more like bitcoin.
The halving reminds consumers that bitcoin supply is finite and demand is rising, driving up its price over time. More people desire to utilize something as it gains value, therefore the cycle continues.
The halving will cause consumers to switch to processors with lower transaction costs in the short run. Lightning Network, a second-layer bitcoin network, processes transactions outside the blockchain. The Lightning Network processes peer-to-peer bitcoin transactions almost instantly, like the main blockchain.
The difference? Lightning Network transactions cost a few cents. This will become the primary method of dealing for average individuals making minor transfers or utilizing bitcoin to buy products and services because it's fast and affordable. Lightning Network transactions are simple, which may boost customer adoption.
Of course, on-chain transactions will continue. People will use the blockchain to document significant transactions like buying a car or house with a wire payment, not a debit card.
As on-chain network transaction prices rise, network congestion will be compensated by the migration to second-layer networks, which will stimulate more transactions, some of which will happen on the main blockchain, raising processing fees. Even with second-layer networks like Lightning, network fees will certainly climb as bitcoin gets more popular.
As bitcoin becomes more like other currencies, users will feel more comfortable using it. Over a billion adults worldwide have smartphones but no bank accounts, making them financially disenfranchised. Although technologically linked, these people miss the benefits of a global financial system. Only if bitcoin is fast, trustworthy, cheap, and accessible can they use it for daily spending or savings. Bitcoin is just that because the halving encourages second-layer networks like Lightning.
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