Every time there are 210,000 blocks mined in the Bitcoin network a “Bitcoin halving” takes place (approximately four years).
Bitcoin halving is when the rate at which new Bitcoins are added to the system by half. It is part of a larger plan to limit the number of Bitcoins that can be made. This is different from fiat currencies like the US dollar, which can be made in any amount and lose value when governments print too much of them.
When the number of Bitcoins in circulation is cut in half, the network can’t make as many new ones. Because of this, prices could go up if demand stays high and the number of new coins is limited. This has happened before and after previous halvings, but since each halving is different and the demand for Bitcoin can change a lot, it is hard to predict what will happen next.
On the Bitcoin blockchain, a “block” is a file containing one megabyte’s worth of Bitcoin (BTC) transaction records. However, 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. It is the miners who get paid in Bitcoin when these blocks are finally completed.
When Bitcoin was first created, miners received 50 BTC for each block they mined. Because of this, users could be enticed to participate even before it became clear how successful the mining was.
The last three Bitcoin halves, according to history, occurred in 2012, 2016, and 2020. After mining blocks were reduced from 50 to 25 BTC in 2012, the first Bitcoin halving took place.
As of May 11, 2020, each new block mined will only generate 6.25 new BTC because of the halving event in 2016.
How Does Bitcoin Halving Work?
To understand how the Bitcoin price halving works, you must first understand the fundamentals of how Bitcoin is created.
A decentralized system creates Bitcoins by having individuals known as “miners” use powerful computers to solve cryptographic puzzles to verify and validate transactions on the Bitcoin ledger, also known as the blockchain. In exchange, they are paid in the form of newly created Bitcoins.
In a way, Bitcoin mining is a game. Blocks on the blockchain are being added in a race by miners to be the first to be added. Then, Bitcoins are given as a reward for each block that is added to the network. The block reward was cut in half regularly by Bitcoin’s original programmer.
Bitcoin halving occurs approximately every four years because it currently takes four years to add many blocks. In May 2020, the third and final halving was completed. Meanwhile, it is predicted that the next one will arrive in 2024. Supposedly, once there are 21 million Bitcoins in existence, there will be no more created.
Why Bitcoin Halving Is Important
Bitcoin’s past halvings have been long-term positive drivers for the coin’s price if history is any guide. Bitcoin’s third halving, on the other hand, is almost certain to have a significant impact on the BTC ecosystem. The number of Bitcoin miners is expected to decline primarily because the economic benefit of mining is becoming less enticing and, for less effective miners, unprofitable.
Deflationary tendencies are regularly demonstrated by the halving of the Bitcoin supply. As a decentralized cryptocurrency, Bitcoin cannot be printed by governments or central banks, and the total supply is completely known. This has been the core of the bull case for Bitcoin since its inception.
What Happens To Bitcoin Prices During Halving Event?
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:
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.
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.
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.
When Is The Next Bitcoin Halving Event?
Around 89 percent of the 21 million Bitcoins ever created have been mined and put into circulation, making up around 18.5 million BTC. It is estimated that around 900 new Bitcoins are mined and added to the digital currency supply every day, but this could be even higher due to increased mining rates.
It is predicted that all 21 million BTC will be mined by the year 2140 when the final fractions of Bitcoin will be mined.
Block mining’s reward will be halved again in the future, but no specific date has been set for this reduction. Assuming that 210,000 blocks have been mined since the last halving, we will know the answer at that point.
The next halving will likely take place in early 2024; at that time, a miner’s reward will be reduced to 3.125 BTC.
Implications Of Bitcoin Halving
Adding transactions to the blockchain and earning Bitcoin will be more difficult if the reward for mining is reduced. Mining rewards bring in new Bitcoins into the economy. Cutting these payments in half, therefore, reduces new Bitcoin inflow.
This is where supply-and-demand economics come into play A decrease in supply and an increase or decrease in demand affect the price.
The rate of inflation in Bitcoin has also been reduced as a result of the halving event. Inflation occurs when a currency loses its purchasing power or depreciation. It is the deflationary foundation of Bitcoin that makes it so appealing. The halving is a critical step in the process.
From 50 percent in 2011 to just 12 percent this year and 4–5 percent this year, Bitcoin’s inflation rate has steadily decreased since 2012. Inflation is currently at 1.77 percent. After each halving, the value of Bitcoin increases.
The value of Bitcoin has risen each time the coin has been halved in the past. A product’s price rises in response to a decrease in supply. On the other hand, this upward trend will take time to manifest.
To compensate for the high cost of running the computers that solve the mathematical puzzles, the price of BTC would have to rise significantly. For miners to remain viable, the price must rise in tandem with the decline in reward.
For a new technology that can produce more hashes per second while using less energy and lowering overheads, there will be high demand.
If other countries’ economies show interest in digital currency, Bitcoin’s value could be affected. Bitcoin’s price is likely to rise as a result of the increased attention it is receiving. As more and more businesses, large and small, get involved in Bitcoin and blockchain technology, the volume of transactions will rise.
How Bitcoin Halving Can Be Traded
During the halving, contracts for difference (CFDs) are the best method of trading Bitcoin because you don’t have to own any of the currency. You can also buy Bitcoin from a crypto exchange directly.
If this is the case, you will need to get a cryptocurrency exchange account and a safe place to store your tokens. Profits would be subject to standard taxation.
