Understanding Bitcoin Halving
Bitcoin Halving is an event when Bitcoin miners’ block rewards are cut in half. Halving happens every 4 years and reduces the amount of Bitcoin entering the supply.
Hello everyone, it’s me again. I’m Neo — Admin — Community Manager of Optimus Finance and Growth Marketing of LECLE Vietnam.
In this article, we will talk about the term, I can be sure that anybody who has joined Cryptocurrency knows, it is Bitcoin Halving.
I’ve believed that if anyone comes to the financial market in general and cryptocurrency in particular, we will surely know about Bitcoin, the crypto with the largest market cap at the moment — the first crypto ever created and it comes with a halving mechanism.
Halvings are said to positively impact the Bitcoin price and the market in general. So let’s come with me to explore Bitcoin Halving.
1. What is Bitcoin Halving?
Bitcoin Halving is an event when Bitcoin miners’ block rewards are cut in half. Halving happens every 4 years and reduces the amount of Bitcoin entering the supply.
In 2009, Bitcoin was created by Satoshi Nakamoto. Bitcoin is designed to be decentralized and trustless, with a hard cap of 21 million and strict rules on how it is released, preventing other parties from creating more Bitcoins.
The halving policy was written into Bitcoin’s mining algorithm to counteract inflation by maintaining scarcity. In theory, the reduction in the pace of Bitcoin issuance means that the price will increase if demand remains the same.
Those blocks of transactions are added roughly every 10 minutes, and the Bitcoin code dictates that the reward for miners is reduced by half after every 210,000 blocks are created.
2. How does Bitcoin Halving work?
After every 4 years, their mining reward is halved, which decreases the amount of new Bitcoin entering the supply. In 2009, the mining reward for each block was 50 Bitcoins. The reward was cut in half, down to 25 Bitcoins after the first having, then 12.5 after the second, etc.
In all, there will only be 32 halvings, with the last in 2140. At that point, there will be 21 million BTC in circulation and no more coins will be created.
Similar to gold, the supply of Bitcoin is limited, specifically to 21 million Bitcoins and is unchangeable, making this digital currency scarce. Therefore, cutting the amount of mined Bitcoin every 4 years could theoretically drive its price higher.
3. History of Bitcoin halvings
3.1. Pre-halving period of Bitcoin
The first block of Bitcoin blockchain, also known as “Genesis Block” or “Block 0”, was mined on 3 January 2009 by the coin’s enigmatic creator, known only as Satoshi Nakamoto. The creator of Bitcoin set the initial block reward at 50 BTC. Since Bitcoin had no monetary value in those days, there was no real incentive to participate in mining, and Satoshi was almost the only miner.
However, as early as 17 March 2010, BitcoinMarket.com became the first-ever Bitcoin exchange. That caused a surge of interest in the new currency, and, in spring 2011, the price of Bitcoin surpassed $1.
3.2. The first Bitcoin halving in 2012
On November 28, 2012, the first Bitcoin halving happened after 10,500,000 BTC (210,000 blocks of 50 BTC) had been mined, reducing the mining rewards by 50%, to 25 BTC per block.
The BTC price took a massive surge, from $12 to a new ATH at $1217 on November 28, 2013.
3.3. Bitcoin halving 2016
The second halving took place on 9 July 2016. That date was highly anticipated by the crypto community. These expectations, coupled with a sharp rise in Bitcoin’s renown and acceptance, led to a noticeable price increase that began at the end of May, a month and a half before the halving.
However, a correction took place in mid-June, and, soon after the halving itself, the price fell again with its local minimum reaching May levels.
As it later turned out, that was only a short-term correction. The bullish trend soon continued and developed into exponential growth. This growth peaked on 17 December 2017, when the price reached its all-time high of $19,700. After that, a long bearish trend set in.
In 2017, the popularity and acceptance of Bitcoin and other cryptocurrencies grew rapidly, attracting a large number of new participants to the crypto market. That, in turn, led to the emergence of an ‘ICO bubble’, which further increased demand for Bitcoin since many ICOs accepted it.
3.4. Bitcoin halving 2020
The third halving, which took place on 11 May 2020, as well as the previous Bitcoin halving, did not cause an immediate price increase. It’s true that growth began on earlier halving dates at the beginning of the year, but the coronavirus crisis that started in March caused Bitcoin’s price to collapse.
At the same time, it should be taken into account that the current amount of Bitcoin being mined is quite small compared to the total amount of Bitcoin traded, and it is unlikely that a relatively small drop in supply can cause a significant price increase. Thus, a possible further increase in the price of Bitcoin will be much more influenced by a growth in demand than a reduction in supply.
3.5. The next Bitcoin halving
The next halving is expected around 2024. It will drop the block reward to 3.125 BTC.
4. Advantages and Disadvantages of Bitcoin Halving
4.1. Advantages
Inflation: Unlike the traditional fiat currencies that can easily be issued by governments, Bitcoin is designed to be a decentralized and deflationary currency, with a predictable inflation rate decreasing after every halving.
Bitcoin’s inflation rate in 2011, before the first halving, was 50%. After the 2012 halving, this rate was reduced to 12% and resulted in a sharp price increase. In 2016, this rate was recorded at around 4–5% and as of now, after the most recent halving in 2020, Bitcoin’s inflation rate is approximately 1.77%.
Value: As the supply decreases, the value of Bitcoins that are yet to be mined increases, raising the demand and popularity. Therefore, the previous halvings can be seen followed by a bull run, raising the price despite going through large drops.
4.2. Disadvantages
Cost of mining: Since Bitcoin mining requires high equipment and electricity costs, the BTC price needs to rise dramatically in order to keep miners in the network, increasing the hash rate. Hash rate is the number of SHA256 computing operations completed per second, and the more miners, the higher the hash rate, the faster and more secure the network will be. However, as halving may lead to a bull run, it doesn’t happen immediately. The beneficial result couldn’t be seen until a few months after the first halving in 2012, and nearly a year after the second halving in 2016.
If the positive impacts keep on taking longer to be noticed, miners’ profitability might not be attractive enough to miners. As a result, impatient miners may leave, leading to the possibility of 51% attacks on the Bitcoin network due to reduced speed and security.
5. How does Bitcoin Halving affect investors and miners?
5.1. Investors
Bitcoin halvings may theoretically increase the BTC price as the supply is reduced and the demand rises, potentially leading to other cryptocurrencies’ prices surging. This generally initiates anticipation of halvings among the community, raising trading activities on different blockchain platforms in the crypto market.
Even though the effect did not occur immediately after the previous halvings, we can still see a major difference in the BTC price since the start, from only a few cents to over $60,000. Therefore, BTC halvings may be good news for long-term investors.
5.2. Miners
Bitcoin mining is a costly process as miners need to invest in proper equipment and electricity, solving complex mathematical puzzles to keep the Bitcoin network running smoothly and securely.
Theoretically, halving causes a chain reaction involving miners’ block rewards:
6. What if Bitcoin has no block reward?
With a total of 32 halvings in total, each happening roughly every 4 years, the total amount of Bitcoins will be fully mined around the year 2140. At this point, miners will no longer be incentivized with block rewards, but with transaction fees instead.
Therefore, transaction fees on the Bitcoin network are expected to rise in the future.
7. Closing thoughts
Bitcoin and its halving mechanism have proven to have positive impacts on the market. Investors can expect these impacts to happen months before halving happens.
However, the Bitcoin price is not influenced by halvings alone, but also by other factors, so we should not make decisions based on halvings alone. It is the best way to stay alert and be well prepared for any circumstances.
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