Bitcoin Halving: How It Works And Its Relevance
Bitcoin halving is an event in which miners receive 50% fewer Bitcoin for verifying transactions. Once every 210,000 blocks – or about every four years – the network will the total supply of Bitcoin, up to a maximum of 21 million.
Because they reduce the amount of new Bitcoin being generated by the network, Bitcoin network halves are significant events for traders. As a result of the reduced number of coins available, prices may rise in the future if demand remains high. Prior halvings saw Bitcoin’s price rise sharply before and afterward, but this time around the circumstances are different, and demand for bitcoin may fluctuate greatly.
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How Bitcoin Halving Works
Blockchain transaction records are stored in the form of “blocks,” each of which contains 1 MB of Bitcoin (BTC) transaction data. Competing “miners” are tasked with adding the next block, which involves solving a difficult mathematical problem using special hardware, then computing the “hash,” a random 64-character string, before locking the block to prevent it from being altered.
Miners are always rewarded with Bitcoin for the successful completion of these blocks.
Now let’s take a look at how the Bitcoin halves work. When the cryptocurrency was first launched, miners were paid 50 BTC per block. Early users could be enticed to mine the network in this manner, even if it was not clear how successful it would turn out to be.
When all 21 million Bitcoins have been mined, the rate at which new Bitcoins are created drops by half after every 210,000 blocks.
It is part of an overall plan to keep the maximum supply of Bitcoin fixed, unlike fiat currencies like the US dollar, which have essentially unlimited supplies and lose value when governments print too much of it.
The network’s ability to generate new Bitcoin is curtailed when the supply of existing Bitcoin is halved. Prices could rise as a result if demand remains high and the number of new coins available is constrained. This has happened before and after previous halvings, but each halving is unique and the demand for Bitcoin can fluctuate wildly, making this phenomenon difficult to predict.
Every 210,000 blocks added the reward for mining a block is reduced by half. Bitcoin’s halving occurs approximately every four years because it currently takes four years to add that many blocks. In May 2020, the third and final halving was completed. It’s predicted that the next one will arrive in 2024.
Why Bitcoin Halving Is Important
Bitcoin’s creator is still a mystery, but the platform was built in such a way that it would be a deflationary currency, with an increasing purchasing power over time.
Creating new Bitcoin is becoming more and more expensive due to the reward reductions brought on by the price halvings. The value of each coin has steadily risen throughout history. In contrast, the purchasing power of currencies like the US dollar depreciates over time.
Debate rages on as to whether Bitcoin is a deflationary asset.
For example, the cost of electricity to mine blocks and the willingness of people willing to pay for Bitcoin that are the rewards for that work are both factors that influence the value of Bitcoin more than any other. In other words, Bitcoin is deflationary in the sense that there will be fewer coins available overtime to pay a relatively fixed electricity bill, so each coin needs to be worth more than previous coins.
Some believe the Bitcoin halving was done to entice more people into the network as miners by making it easier to get a larger percentage of coins generated early on.
What Happens To Bitcoin Prices During Halving?
The value of Bitcoin halving has historically been associated with an increase in its price. Of course, price fluctuation is influenced by a variety of factors other than just halvings. What happened during the first three halving events is summarized here:
1. First Halving
Bitcoin’s price had halved to about $11 at the time of the first halving in November 2012. An incredible 100-fold increase was seen in just one year.
2. Second Halving
The Bitcoin network reached 420,000 blocks in July 2016, triggering a second halving of the block size. The price of Bitcoin fluctuated between $500 and $1,000 for several months before rising to around $20,000 in December of last year.
3. Third Halving
When the third halving took place in May 2020, the cryptocurrency market was once again on a bull run. When this halving occurred, Bitcoin was trading at around $9,100. By the end of the year, it had reached about $30,000.
Implications Of The Bitcoin Halving Event
Bitcoin miners will be able to make less money by adding transactions to the blockchain if the reward for mining is reduced. New Bitcoins enter the economy as a result of the mining process’s payouts. Consequently, cutting these payments in half reduces the influx of fresh Bitcoin.
This is where supply and demand economics come into play. The price changes as a result of a decrease in supply and an increase or decrease in demand.
Due to the halving event, Bitcoin’s inflation rate has also been reduced. The depreciation of a currency, or the loss of purchasing power, is an example of inflation. Bitcoin, on the other hand, is built on a deflationary foundation. An important part of the process is halving.
Since 2012, Bitcoin’s inflation rate has dropped from 50 percent in 2011 to just 12 percent this year and 4–5 percent this year. It now has an inflation rate of 1.77 percent. This means that the value of Bitcoin rises after each halving.
Every time Bitcoin has been halved in the past, its value increases. As the supply of a product declines, so does the price, driving up demand. This upward trend, on the other hand, will take time to materialize.
The price of BTC would have to rise significantly for miners to receive half as many coins due to the high cost of electricity used to power the computers that solve the mathematical puzzles. If the price does not rise in tandem with the decrease in reward, miners will find it difficult to remain competitive and in business.
There will be a high demand for a new technology that can generate more hashes per second while consuming less energy and lowering overheads.
Bitcoin’s value could be affected by the economies of other countries that have shown an interest in digital currency. More importantly, the increased visibility that Bitcoin is now receiving will most likely increase its price. There will be an increase in the volume of transactions as more and more businesses, small and large, get involved in Bitcoin and blockchain technology.
How Can Bitcoin Halving Be Traded?
Contracts for difference (CFDs) are the best way to trade Bitcoin during the halving because they allow you to speculate on the price of bitcoin without actually owning any of it. The other option is to buy Bitcoin directly from a crypto exchange.
In this case, you will need to open an exchange account and keep your cryptocurrency tokens in a secure wallet. Profits would be taxed in the usual manner.
What Happens After The Maximum Number Of Bitcoin Has Been Issued?
Bitcoin block rewards will no longer be given out as Bitcoin when the last halving occurs in 2140. Miners will instead receive fees from network users, who buy and sell Bitcoin, to keep them motivated to process transactions on the blockchain.
Bitcoin halving is a much-talked-about event that happens every four years or so. The first one happened in 2012, and since then, there have been four more. Part of the code that runs the virtual currency is to keep the total amount of it the same.
As an investor, you should know about Bitcoin halvings because they have caused big changes in the price in the past. The next half will probably happen in 2024.