Bitcoin’s halving is an event in which the percentage of new units of the world’s largest cryptocurrency in circulation is halved.
This is part of an overall strategy of keeping a fixed maximum amount of Bitcoin instead of fiat currencies such as the US Dollar, which lose value with virtually unlimited reserves when the government prints too many Bitcoins.
How does BTC Halving work?
To understand how half of Bitcoin works, you first need to understand the basics of creating cryptocurrencies. Bitcoin is created by a decentralized system where people known as miners use a powerful computer system to solve crypto puzzles and verify and verify Bitcoin Ledger transactions called the blockchain. In return, they receive payments in the form of newly created Bitcoins.
Bitcoin mining is a kind of competition. Miners aim to be the first to add new blocks to the blockchain. You receive a certain amount of new Bitcoin for each block you add as a reward. Bitcoin’s creators programmed block rewards in half at regular intervals. The reward for mining blocks halves for every 210,000 blocks added. It currently takes about four years to add many blocks, so Bitcoin halvings occur roughly every four years. The last and third halvings occurred in May 2020. The next is expected in 2024.
Theoretically, after 21 million Bitcoins have been created, no more will be generated.
Just like there’s a limited amount of gold on Earth, the amount of Bitcoin is limited to 21 million, says Buchi Okoro, CEO of Quidax, an African cryptocurrency exchange. You could almost think of Bitcoin as a natural resource, but for the internet. That’s why it got the term ‘digital gold.’
Why do Bitcoin Halvings Occur?
Bitcoin’s creation still remains a mystery. The belief is that the platform becomes a deflationary currency, and purchasing power will increase over time. Creating a new Bitcoin will be more and more expensive, as mining rewards will be lower if you halve it. Over time, all coins become more and more valuable. This contrasts with currencies like the US dollar, which inevitably lose purchasing power over time.
Whether Bitcoin is truly a deflationary asset is debatable.
Suppose Bitcoin was an acceptable payment for goods and services. In that case, the interpretation is that way, explains Daniel Waterloo, adjunct professor of industrial technology and management at the Illinois Institute of Technology. However, most businesses do not accept Bitcoin as payment, so this might not be an excellent way to measure its deflationary value.
Instead, Bitcoin’s value has more to do with the economy connected to the real world, such as the cost of electricity required to mine a block and what people are willing to pay for in Bitcoin. According to Waterloo, it works. Bitcoin is then deflationary in the sense that, over time, fewer coins are available to pay a relatively fixed electricity bill, so each coin needs to be worth more than the last coins (before the halving event) says. Another theory behind the Bitcoin halving is that the creators of the cryptocurrency initially wanted the creation of most coins to encourage people to join the network as miners002E.
What Happens to BTC Prices During Halving?
Historical data shows a correlation between Bitcoin’s halving and Bitcoin’s price rise. Of course, several factors affect the price, not just the halving. Here is a summary of what happened before and after the first three halvings.
- First Halving: During the first halving in November 2012, the price of Bitcoin was around $11. It has grown a hundredfold in one year.
- Second Halving: In July 2016, the Bitcoin network reached its 420,000-block milestone, halving its second. The price of Bitcoin fluctuated between $500 and $1,000 over several months, eventually peaking at around $20,000 in December 2017.
- Third Halving: The third halving occurred in May 2020 and coincided with another bullish rise in cryptocurrencies. At the time of the halving, Bitcoin was trading at around $9,000. By the end of the year, it had grown to about $30,000.
Early in the adoption cycle of Bitcoin, the correlation between price and mining rate was profound, says Tom Frazier, CEO of Redivider Blockchain, a Bitcoin mining fund. Today and into Bitcoin’s maturity, each halving is likely to have less and less impact on the price, especially as more countries adopt the cryptocurrency and a more stable technological and regulatory infrastructure is in place.
According to Tracy Levin, head of data analysis and decision-making at the Blockchain Chamber of Commerce, we can find context and go back to history in terms of deflation in Bitcoin.
Levine says that only three of the 64 total halvings scheduled to take place prior to 2140 have occurred. If the trend of higher highs and higher lows after a halving continues, the future price of Bitcoin should likewise continue to serve as an inflationary hedge against other representations of value that can arbitrarily inflate.
Issuing Maximum Number of Bitcoins
The final halving that will occur in 2140 is one thing to look forward to, and the block rewards will not be in the shape of Bitcoin. Alternatively, miners who pursue the process transactions on the blockchain by receiving commissions from network users, i.e., those who buy and sell bitcoins.
The Financial Takeaway
The Bitcoin halving is a fascinating event that occurs approximately every four years, the first of which occurred in 2012. It is part of the cryptocurrency’s foundation program to keep the overall supply fixed. It is crucial to recognize that Bitcoin’s halving has historically caused significant price movements as an investor. The next halving will be in 2024.
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