What is Bitcoin Halving?
Bitcoin’s most recent haling happened on the 20th of May 2020 and is a phenomenon that happens every 4 years. In order to understand what Bitcoin halving is let’s first see how bitcoin’s network work. (If you already know you can progress to the next paragraph).
Bitcoin blockchain consists of big computers or nodes, that are located in different geographic areas around the world. The computers run and keep all the history of transactions that have occurred on its network. Each node is responsible for approving a transaction on the blockchain. However, this is not very easy, since computers need to be able to solve long complex equations and run a series of checks to ensure that the transaction is valid.
The more computers added, the stronger the blockchain stability and security it is. There are currently over 10,000 nodes estimated to be running Bitcoin’s code.
Bitcoin mining is the process where people use their computers to participate in bitcoin’s blockchain network as a transaction processor and validator. Bitcoin uses the proof of work (PoW) system where miners need to prove they have contributed in the processing of transactions to be rewarded with bitcoins. The term mining is a reference to the way precious metals are being mined. The difference here is that miners need to solve extremely complex mathematical equations than they will then confirm a transaction and add it into a block. When a block is filled it creates a chain of blocks and the transactions within the block get rewarded.
Bitcoin halving occurs approximately every four years because this is the time it requires for 210,000 blocks to be mined. The block reward given to the miners for processing transactions is cut in half. This cuts in half the rate at which new Bitcoin is released into circulation. This is Bitcoin’s way of using a synthetic form of inflation that halves every four years until all Bitcoin is released and is in circulation.
It is being said that this process will continue until the end of 2140 and after that miners will be rewarded with fees for processing transactions. These fees will need to ensure that miners are still getting a good incentive to continue mining and keep the network going.
Why does it happen?
Halving is significant because it marks another drop in Bitcoin’s supply. The maximum supply of Bitcoin is 21 million where more than 18 million are already in circulation. This leaves another 2-3 million available to be released via mining rewards.
In 2009, the reward for each block in the chain mined was 50 Bitcoins. After the first halving it was 25, then 12.5, and it became 6.25 Bitcoins per block as of May 11th, 2020. To put this in another context, imagine if the amount of gold mined out of the earth was cut in half every four years. If gold’s value is based on its scarcity, then a “halving” of gold output every four years would theoretically drive its price higher.
The theory of halving suggests that when there is a decrease in supply, demand goes higher and therefore it results in higher prices. Miners incentive remains big regardless of smaller rewards since the price of the Bitcoin is increased in the process.
It is important to note that this event does not only cut miners’ rewards in half but also cuts in half Bitcoin’s inflation rate and the rate at which new Bitcoins enter circulation.
What will happen If having does not increase demand and price?
In this scenario when the demand and price do not go higher, miners will have no incentive to continue mining since the reward for completing transactions would be smaller and the value of Bitcoin would not be high enough.
In the event that the reward has been halved and the value of Bitcoin has not increased, the difficulty of mining would become much easier to keep miners incentivized. This means that the quantity of Bitcoin released as a reward is still smaller but the difficulty of processing a transaction is reduced.
This has happened already twice and proved to be a successful process. So far, the result of these halvings has been followed by a big drop. Even though big drops occurred, the price was still much higher than what it was before the halving. Let’s take for example, 2017 when Bitcoin rose above $20,000 and then dropped all the way to $3,200. That’s is indeed a huge drop. However, the price before the halving was only $650 which keeps the value almost 5 times higher even though it dropped to $3,200 from $20,000.
In any case, you should not forget that Bitcoin is a highly speculative coin, and it can be very volatile at times. From Elon Musk’s twits, to China banning financial institutions from providing crypto-related services.
What’s the halving effect on Bitcoin price?
According to Investopedia, “in the past, these Bitcoin halvings have correlated with massive surges in Bitcoin’s price. The first halving, which occurred in November of 2012, saw an increase from about $12 to nearly $1,150 within a year. The second Bitcoin halving occurred in July of 2016. The price at that halving was about $650 and by December 17th, 2017, Bitcoin’s price had soared to nearly $20,000. The price then fell over the course of a year from this peak down to around $3,200, a price nearly 400% higher than Its pre-halving price.”