halving results in a 50% reduction of the miners’ reward.
- It helps to reduce the inflation rate of Bitcoin
which creates confidence among investors.
- The next Bitcoin
halving event will take place in 2024.
halving events will continue to happen until people mine all the 21 million BTC .
Since its inception in 2009 Bitcoin
has maintained a dominant position in the market. Despite a strong performance by its rivals such as Ether (ETH), Caradno (ADA) and Binance Coin, BTC is the cryptocurrency of choice among the general users and investors. Its halving events create confidence in the investors. In this post, we discuss the role halving plays in the Bitcoin
What is Bitcoin halving?
halving is a process where the system reduces the mining rewards by half after attaining a target of 210, 000 blocks. This means that the blockchain reduces the quantity of BTC miners are able to produce after 210 000 blocks are added to the network. In general, the blockchain attains this target after 4 years.
Nevertheless, the length of time the 210 000 blocks are added to the blockchain depends on other factors such as the hashrate and the mining difficulty within a certain period.
Basically, crypto halving controls the quantity of BTC in supply. The halving or halvening is important in managing Bitcoin
's inflation rate. This is similar to a central bank’s monetary policy. Let’s compare the two.
A currency’s monetary policy
The price of a currency or cryptocurrency depends on its demand and supply. That is why central banks use monetary policies to manage the supply of fiat currencies. Primarily, they can deliberately increase or decrease the money supply to influence the exchange rates.
However, unlike national currencies which do not have limited supply, the maximum supply of BTC is 21 million. According to CoinMarketcap, its current circulating supply is 19,199,600. However, this figure increases everyday as the miners produce more BTC.
Similar to a monetary policy, Bitcoin
halving controls the production of BTC. This is because changes in supply of BTC determines its value. More significantly, the automatic and transparent control of the supply of Bitcoin
enables it to store value, a reason why many investors keep their faith in it.
The Bitcoin mining process
For us to appreciate the impact of Bitcoin
halving, we should understand how crypto mining works. The Bitcoin
blockchain uses the proof-of-work consensus mechanism. As a result, the validation of transactions is carried out by miners who solve complex cryptographic puzzles. Specifically, the miner that solves the puzzle adds a block to the blockchain and earns the mining rewards.
The mining process is important in maintaining the blockchain’s efficiency and security. Therefore, the more miners the blockchain has the more secure it is. In order for miners to continue mining Bitcoin
they should generate profit from doing that. This means that the revenue they earn should be more than the expenses they incur. If the mining reward is low many miners will get out of the mining business, leaving the blockchain exposed to many security risks.
History of Bitcoin halving
From the beginning, Bitcoin
miners earned 50 BTC per every block they added to the network. That went on until 2012 when the first Bitcoin
halving took place. As such the mining reward was reduced from 50 BTC to 25 BTC per block. The next halving event occurred in 2016, when the mining reward was further decreased to 12.5 BTC per block. Finally, the very last halving event took place in 2016 when the reward was reduced to 6.25 BTC per block. This is the current rate.
Bitcoin halving events - Theblockchainnews
The table shows the BTC halving schedule.
When will the next BTC halving event?
Based on the previous halving events, we anticipate the next halving to occur in 2024. There is no exact date for this to take place. This is because it will occur as soon as 210,000 additional blocks are added to the blockchain. Also, remember that the halving process will continue until all the 21 million BTC are mined. In fact, analysts believe that the last BTC will be mined in 2140. However, the pace of Bitcoin
mining will keep on decreasing until that time.
Why is Bitcoin halving taking place?
The creator of Bitcoin
, Satoshi Nakamoto, coded the halving mechanism in the blockchain from the very beginning. As explained before, the logic behind halving is to control the supply of Bitcoin
which affects its inflation and price. Since there is no central authority to regulate the dynamics of BTC, halving enables Bitcoin
to effectively perform its primary functions of being a medium of exchange and a store of value.
The impact of Bitcoin halving
halving impacts the blockchain in several ways. First, it decreases the quantity of Bitcoin
produced per day thereby slowing the increase in its supply. In the long run, this should lead to a rise in the price of BTC provided its demand remains constant or increases. A rise in the value of BTC will attract new investors.
In the past, Bitcoin
halving was followed by a rally which resulted in bull markets. However, the rise in the price does not occur immediately after the halving event. The 2012 halving event resulted in a surge of the price from $12 to $1 213 within one year. The 2016 halving event had a similar effect as its price increased by 506%, from $647 to $19,800. With the most recent halving in 2020, the price of BTC increased by 347% from $8,787 to $68,000. It is important to note that with the previous halving the resultant bull runs were followed by extended bear markets.
History of BTC halving- Consulting24
Halving negatively affects the miners as their rewards decrease. In the short run, this leads to a reduction in mining profit. Therefore, mining firms with inefficient machines may be forced out of business since they can make huge losses. As other miners leave the industry the Bitcoin
hashrate and difficulty decrease, enabling the remaining miners to make profit.
It is worth noting that if the mining reward decreases at a time the price of the BTC increases, the miners are not negatively affected.
Another important effect of Bitcoin
halving is a decrease in the inflation rate of BTC. Unlike other cryptocurrencies which are inflationary in nature, BTC is deflationary. As such, its inflationary rate has been decreasing after every halving event. The inflation rate of BTC was 50% in 2011, but it fell to 12% after the 2012’s halving event. It further decreased to about 4-5% following the 2016 halving. Currently, it is around 1.7% and analysts expect that it will further decrease after the next halving event.
In summary, Bitcoin
halving refers to a process where the miners’ rewards decrease by 50% after 210 000 blocks are added to the blockchain. In the past, the halving events were followed by increases in the price of BTC. They also resulted in a fall in Bitcoin
’s inflation rate.
Author: Mashell C.
, Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.