In the cryptocurrency world, several methods and approaches are implemented, especially in regard to maintaining the value of cryptocurrency over time. The methods used vary across different cryptocurrencies and tokens. In the case of Bitcoin, a mechanism known as halving is employed — commonly referred to as Bitcoin Halving.
Bitcoin Halving refers to the splitting of the rewards earned by miners on the Bitcoin network into two every four years. This is done as a measure against inflation, as halving reduces the amount of new Bitcoins in circulation.
In this article, you will learn about Bitcoin Halving: what it is, why it is important, how it works, and its implications.
Understanding Bitcoin Halving
Bitcoin is not regulated by any agency or government, but rather by individuals worldwide who contribute to validating transactions and securing the network. These individuals are commonly known as miners. In recognition of their efforts, they receive incentives in the form of newly minted BTC.
However, every four years, the block rewards for miners undergo a halving process, cutting them in half. This implies that miners receive only half of the normal rewards. For example, the initial Bitcoin halving occurred in 2012, and miners were rewarded with 25 BTC instead of the usual 50 BTC. This reduction in the rewards of miners is known as Bitcoin halving.
Why Does Bitcoin Mining Occur?
Bitcoin halving is a significant historical event that takes place after the creation of 210,000 blocks on the network. It typically takes around four years to generate the specified number of blocks, with each block taking approximately 10 minutes to create. The purpose of halving is to ensure that Bitcoin maintains its status as a deflationary asset, resistant to inflation.
Satoshi Nakamoto, Bitcoin’s inventor, aimed to establish a digital currency with a controlled supply. This supply control is crucial in mitigating inflation. By reducing mining rewards through halving, the rate at which new BTC is created and introduced into the market is slowed down. This scarcity of Bitcoin as a commodity helps minimize inflation over time.
For a comprehensive understanding of Bitcoin mining, we recommend reading the article by DroomDroom.
Phases of Bitcoin Halving
According to experts, there are five phases of Bitcoin halving. These phases have been identified as the pre-halving period, the pre-halving rally, the pre-halving retrace, re-accumulation, and the parabolic uptrend.
Pre-halving Period
This phase represents the time when investors are interested in entering the market, anticipating a good return on investment from Bitcoin.
Pre-halving Rally
Initiated by investors, this phase occurs approximately 60 days before the halving day.
Pre-halving Retrace
This phase usually occurs on the day of the halving and is accompanied by feelings of fear, uncertainty, and doubt. The price of Bitcoin is unpredictable, and cryptocurrencies are highly volatile, posing a high investment risk. During this phase, investors question their decision to invest in Bitcoin, assessing whether the halving was profitable. The decline in the price of Bitcoin in December 2013, where it fell by over 80%, and did not rise until two years later, is referred to as the pre-halving retrace.
Re-accumulation
Sometimes, there is no significant instant increase in the price of Bitcoin after the halving. This can be disappointing to investors, fueling impatience as they wait for the price to rise and bounce back from the retrace. This phase is referred to as the re-accumulation phase.
Parabolic Uptrend
This is the period when Bitcoin experiences a substantial increase in price, reaching an all-time high. Experts refer to this as a breakout from the re-accumulation area, launching into the parabolic uptrend, which is a season of all-time highs.
How Does Bitcoin Halving work
Bitcoin uses a consensus algorithm known as the Proof of Work (PoW) algorithm. The proof of work algorithm is an energy-intensive process employed by blockchain networks like Bitcoin to validate transactions on the network.
To create new blocks on blockchain networks using the proof of work consensus algorithm, computationally challenging puzzles are solved. This process is referred to as ‘mining,’ and it is energy-intensive. Individuals who validate transactions by solving the mathematical puzzle are called miners, and they are rewarded with tokens for contributing to the network.
Miners on the Bitcoin network receive rewards in the form of Bitcoin. Prior to the first halving in 2012, miners were rewarded with 50 Bitcoins every 10 minutes, as it took 10 minutes to create one block. When the halving occurred in 2012, the block rewards were reduced to 25 Bitcoins every 10 minutes. The halving is automatic and occurs without human interference. Halving events will continue every four years until the rewards reach exhaustion after 21 million Bitcoins are mined. Experts predict this to occur by 2140.
Past Bitcoin Halving
Bitcoin halving has occurred thrice since its creation and launch in 2008. The first halving occurred on the 28th of November 2012. Before the halving, the reward for mining a block was 50 BTC. When the halving happened, the block rewards were reduced to 25 BTC. The price of Bitcoin surged in the months and years following the halving, reaching over $1,100 by the end of 2013, marking a significant gain from the pre-halving levels.
The second halving occurred on 11th July 2016. The block rewards were reduced to 12.5 BTC for each block mined. Before the halving, in April 2016 to be precise, the price of Bitcoin was around $417 (USD). But, the price rose to $650 (USD) in July. By January 2017, the value and price rose to $920 (USD).
The third Bitcoin halving occurred on the 11th of May 2020. Miners were rewarded with 6.25 new BTC. As a result of the regulated supply, the value of Bitcoin rose again. The price of Bitcoin was around $5,300 (USD) in March 2020, but the price rose to $9,600 (USD) in May 2020. By the end of 2020, the price had risen to $30,000 (USD). In January 2021, it rose from $30,000 (USD) to almost $42,000 (USD). Experts predict that the next Bitcoin halving will occur in April 2024.
This tweet provides a visual of post-bitcoin halving with a significant price increase:
What Are The Implications of Bitcoin Halving?
Bitcoin’s halving has several consequences. The impact is usually experienced or felt across the entire crypto landscape. Let us go over some of these implications.
Decrease in Miners And an Increase in The Demand for Cost-Saving Mining Devices
A slash in the rewards may be discouraging for many, as mining won’t be as profitable. Many may decide to discontinue. Others who choose to remain will put in more work and find other ways to work efficiently at a reduced cost.
Attraction of More Investors and Press Coverage
Being a deflationary asset makes Bitcoin attractive to investors. This is because its inflation rate is greatly reduced. Cryptocurrencies have garnered the attention of the press. The reasons for this are not far from its decentralized system and volatility rate. When halving occurs, the likelihood of getting the attention of the press and the public is high. This will increase the awareness of Bitcoin and cryptocurrencies generally.
Possible Surge in the Price of Bitcoin
When Bitcoin halving occurs, the supply of Bitcoin is reduced, activating the forces of market demands and supply. With constant demand and reduced supply, the value of Bitcoin appreciates, hence a rise in its price.
Encourages Hodlers
Halving encourages users to ‘hodl’ instead of spending, with the hope of it increasing in value, which has been the case since the first halving. The first halving occurred in 2012. The price of Bitcoin rose from $12 to almost $1,000 after a year. With these statistics, individuals choose to ‘hodl’ Bitcoin rather than spend it.
Conclusion
Bitcoin is a digital asset that is finite in supply. Only 21 million new coins can be created. Once that number is exhausted, new Bitcoins will not be created. Experts estimate that by 2140, 21 million Bitcoins would have been created. Bitcoin halving is a way or system created by Satoshi Nakamoto to ensure the regulated progressive release of Bitcoins into the market.
Experts speculate that the next Bitcoin halving will occur in April 2024. Even though Bitcoin has witnessed an appreciation in value after each halving, individuals and investors are still advised to tread cautiously, understand their risk appetite, and pay close attention to the ecosystem.
This is because there is a probability that a surge in the price of Bitcoin, as was the case with previous halvings, may not happen, as a lot has changed in the ecosystem in the past four years. There is also a probability that there may be a surge in the price of Bitcoin, as has been witnessed over the years. One thing is certain: the halving must happen. Adequate information is key to making informed decisions.
Frequently Asked Questions (FAQs)
What is Bitcoin?
Bitcoin is a decentralized digital currency, created and operated on a peer-to-peer network called blockchain. It enables secure, borderless transactions without the need for intermediaries like banks.
How does Bitcoin Mining Work?
Bitcoin mining involves solving complex mathematical puzzles to validate transactions on the network. Miners compete to add new blocks to the blockchain, and in return, they are rewarded with newly minted Bitcoins.
What is Bitcoin Halving, and Why Does it Occur?
Bitcoin halving is a programmed event that reduces the reward miners receive for adding new blocks to the blockchain by half. It occurs approximately every four years and is designed to control the issuance of new Bitcoins, making it a deflationary asset.
How can I Buy Bitcoin?
You can buy Bitcoin on cryptocurrency exchanges using traditional currency or other cryptocurrencies. First, create an account on a reputable exchange, link a payment method, and then place an order to buy Bitcoin at the current market price.
Is Bitcoin a Safe Investment?
Bitcoin, like any investment, carries risks. Its value can be volatile, influenced by market demand, regulatory developments, and other factors. It’s crucial to conduct thorough research, understand the risks, and only invest what you can afford to lose.
What is the Future of Bitcoin?
The future of Bitcoin is uncertain, but it continues to gain acceptance and recognition as a legitimate asset. Factors influencing its future include regulatory developments, technological advancements, market demand, and evolving public perception. Many see it as a potential store of value and a hedge against traditional financial systems.
