Introduction
Bitcoin is a virtual currency that has grown to be worth more than $43,000 per coin. It’s created by “mining,” which is just another word for generating new bitcoins using computing power. Within a decade, roughly 97 percent of Bitcoins will have been mined.
However, the remaining 3% will be created throughout the next century, with the final Bitcoin expected to be mined around 2140 – more than a hundred years later. The cause of this slow mining is a procedure known as Bitcoin halving.
Bitcoin halving is seen as an advantage by many bitcoin users, mainly because it reduces the number of new bitcoins entering the market. The aim of this protocol is to control inflation and reduce the risk that one person mines all the Bitcoins in existence.
However, there are some downfalls to Bitcoin halving. When done too quickly, Bitcoin halving can cause a drop in Bitcoin’s value as users will have less incentive to hold onto them. In 2013, Bitcoin value dropped from $800 down to $300 after Bitcoin halving was implemented, though it soon recovered.
In the end, Bitcoin halving encourages a healthier and more stable Bitcoin economy and ensures that there is no time limit on how long it can exist.
Fun fact: El Salvador officially adopted Bitcoin as a method of payment on June 9, 2021. This is the first time a country has done so. The cryptocurrency can be used for any transaction that is accepted by the business. El Salvador’s primary currency remains the US dollar.
Bitcoin mining
You can also get bitcoins from other people in exchange for goods and services, but mining Bitcoin is the most popular way of getting them in Bitcoin’s history because it doesn’t require any outside investment of money or time.
Bitcoin mining is the method through which individuals utilize their computers to operate as a transaction processor and validator on the Bitcoin blockchain network. Bitcoin is built around the concept known as proof of work (PoW).
This implies that miners must show effort in processing transactions in order to be paid. This commitment is comprised of the time and energy required to operate the computer hardware and solve difficult calculations.
Stronger computers with specific types of hardware provide greater block rewards, and some corporations have developed mining-specific computer chips. These computers are assigned the responsibility of processing Bitcoin transactions and are rewarded for their efforts.
The word mining is not used literally but refers to the process by which precious metals are obtained. Bitcoin miners are responsible for resolving mathematical challenges and determining the authenticity of a transaction.
They then put these transactions into blocks and chain them together to build the blockchain. When a block becomes full of transactions, the miners that processed and confirmed them are compensated with bitcoins.
One of the reasons why mining has become so popular is that there are only about 2 million bitcoins left to mine, with 18 million already mined so far – almost 83% of all Bitcoins.
Bitcoin’s hard limit
Since its inception in 2009, Bitcoin has come a long way. What has stayed consistent, though, is its hard limit, which was established by its alleged creator, Satoshi Nakamoto, whose true identity remains unknown.
In the Bitcoin source code, Nakamoto set the upper limit at 21 million, implying that no new coins can be mined or brought into circulation after that many coins are mined.
Although Nakamoto did not explain why the total number was set at 21 million, many view it as a significant benefit for the world’s first cryptocurrency. They assert that the cryptocurrency’s limited supply ensures its scarcity and hence maintains a stable price for years to come.
Is it possible to change the hard limit?
It is theoretically possible. This would encompass a majority of Bitcoin users agreeing to accept a lower value for their digital assets. Thus, objectively speaking, the idea that the majority of individuals would consent to lose money on their cryptocurrency investment is unlikely.
What is Bitcoin halving?
This limit on supply – known as Bitcoin Halving – makes each remaining bitcoin increasingly valuable over time, since they will be harder to come by when they’re gone.
The Bitcoin network releases new bitcoins every ten minutes. During the first four years of Bitcoin’s existence, 50 new bitcoins were issued every ten minutes. This figure is halved every four years.
Bitcoin Halving events happen every 210,000 blocks mined and decrease the Bitcoin block reward for completing a block by 50% which roughly happens every 4 years. This means that instead of getting 50 bitcoins per block (in 2009, for example), you’ll only get 6.25 bitcoins at the moment.
This system will operate approximately until the year 2140. At that point, miners will be compensated for processing transactions through fees paid by network users.
Why are miners compensated for mining?
These fees ensure that miners continue to have a motivation to mine and the network continues to operate. The theory is that competition for these fees will keep them low even after the Bitcoin halving period is complete.
This is Bitcoin’s method of artificially inflating the currency by halving it every four years until all bitcoins are released into circulation.
Bitcoin halving history
The first halving event occurred in 2012 when it went from 50 to 25 bitcoins per block.
The second halving occurred in 2016, and the block reward went from 25 to 12.5 bitcoins per block.
The third halving occurred on May 11, 2020, and the current block reward is 6.25 BTC.
When the next halving takes place (approximately early 2024), each block will contain only 3.125 BTC.
How Bitcoin halvings affect the price of Bitcoin
On May 11, 2020, when the last Bitcoin halving occurred, the price of a bitcoin was $8,787.
On April 14, 2021, the price of Bitcoin reached $64,507 (a staggering 634% gain over the pre-halving price).
A month later, on May 11, 2021, the price of a bitcoin was $54,276, a 517% gain that appears more consistent with the 2016 bitcoin halving pattern.
Due to the fact that halving the block reward essentially increases the cost to miners, who are basically the producers of Bitcoins, this should have a beneficial influence on pricing, as miners will need to increase their selling prices to cover their costs.
The recent analysis does indicate that Bitcoin prices tend to climb in anticipation of a halving, frequently several months in advance of the occurrence.
This procedure has been effective on two occasions. Thus far, the effect of these halvings has been a price rise followed by a steep decline.
However, the crashes that followed these increases have kept prices higher than they were before to these halving instances.
For instance, during the 2017–2018 bubble, the value of a bitcoin increased to about $20,000 before plummeting to around $3,200. This is a significant decline, but the price of a bitcoin was around $650 prior to the halving.
While this approach has worked thus far, halving is often accompanied by intense speculation, volatility, and hype, and the market’s reaction to these occurrences is unpredictable in the future.
Why are halvings occurring less than every four years?
The Bitcoin mining algorithm is programmed with the goal of discovering new blocks every ten minutes.
However, as more miners join the network and contribute additional hashing power, the time required to discover blocks decreases. This is rectified by resetting the mining difficulty (or the difficulty for a computer to solve the mining algorithm) around every two weeks to restore the 10-minute target.
As the Bitcoin network has developed dramatically over the last decade, the average time required to discover a block has constantly been less than ten minutes (roughly 9.5 minutes).
Why should I care?
Bitcoin Halving is important to bitcoin miners because it means that eventually, it will be profitable only if you’re mining with the latest and greatest ASIC-based hardware which will further drive up the difficulty of mining.
This could lead to higher transaction fees for those who want their transaction to be processed more quickly, or it could force miners to sell off their bitcoin rewards.
Conclusion
We can see that the bitcoin halving does have an impact on the price of bitcoins.
The reason why this happens is that, while it reduces the supply of Bitcoins, but not by a huge amount, the demand for these coins remains constant over time, and the value increases with every subsequent halving event. In other words, there’s a bottleneck effect, and the price increases exponentially.
The main drawback of this approach is that volatility has been a determining factor during the last three halving events, as all previous price trends have been abandoned.
Another aspect to consider is that since less than 21 million bitcoins will ever exist, it’s important for those who are holding them to spend them. This is the only way to move them from those who have a large number of coins, and it creates more liquidity in the market.
What we’re going to see is that fewer individuals will have access to these bitcoin rewards as time progresses, which means that there’s actually a value proposition here that people should be taking advantage of for their own personal gain.
If you are someone who is thinking about buying BTC, now is the time to do it because it will be more difficult in the future. When supply goes down but demand remains constant, investors can look at this as a positive sign for future growth.
What are your thoughts on Bitcoin Halving? Do you think that reduced supply will increase the value of Bitcoin? Do you think that Bitcoin Halving is important for Bitcoin miners or not? Please leave your comment below.
