If you’ve been staying up to date with the investment news, you've probably caught wind of something called "halving." In the world of Bitcoin, this event holds significant importance for many, as they believe it's the driving force behind Bitcoin's ongoing price surge. However, not everyone is convinced, with some dismissing it as more of a marketing gimmick.
The halving event recently occurred on April 19, 2024, coinciding with Bitcoin's price at $69,736.75. But what exactly is Bitcoin halving, and why does it matter? In this article, we'll explore the ins and outs of Bitcoin halving, its significance, and how it impacts Bitcoin prices.
What is Bitcoin Halving?
Bitcoin halving is the automatic reduction in the supply of bitcoin every four years. What this means for you is that the number of new bitcoins entering circulation gets cut in half. Imagine if you were collecting rare coins, and suddenly, the mint started producing only half as many coins as before. Naturally, this scarcity would make your existing coins more valuable over time. Similarly, bitcoin halving is designed to create scarcity in the cryptocurrency market, driving up demand and potentially increasing the value of existing bitcoins.
Initially, when Bitcoin mining started, miners were rewarded with 50 BTC for each block they successfully mined. The rewards are then halved every four years:
28 November 2012: Reduced to 25 bitcoins
9 July 2016: Reduced to 12.5 bitcoins
11 May 2020: Reduced to 6.25 bitcoins
19 April 2024: Reduced to 3.125 bitcoins
What is Bitcoin Mining?
Bitcoin mining is a process where specialised computers called ASICs (Application-Specific Integrated Circuit Miner) compete to solve a complex mathematical problem. The first miner to find the solution gets to add the next block of transactions to the blockchain and is rewarded with newly issued bitcoin and transaction fees.
While there's an element of chance, miners use powerful hardware to solve the problem faster, not just random guessing. This constant competition incentivizes miners to invest in even more powerful machines, which increases the overall computing power of the network, known as hashrate. The high hashrate makes tampering with the Bitcoin network incredibly difficult because it would require a massive amount of computing power.
The Purpose of Bitcoin Halving
Satoshi Nakamoto, the pseudonymous creator of Bitcoin, designed the cryptocurrency to have a fixed supply of 21 million coins. This reduction in block rewards serves two main purposes. Firstly, it ensures that the total supply of Bitcoin is limited. Secondly, it creates scarcity over time, which can potentially increase the value of Bitcoin due to the economic principle of supply and demand.
How Does Bitcoin Halving Work?
Halving events are hard-wired into Bitcoin’s source code. Approximately every four years, the block rewards given to miners are cut in half. This process gradually decreases the total supply of Bitcoin, moving closer to the 21 million cap over time. The final Bitcoin is expected to be mined around the year 2140.
How Will Bitcoin Halving Affect Bitcoin Prices?
We’ve learned that halving reduces the supply of bitcoins, which in theory increases the price of bitcoin. Let’s take a brief look at the pattern of Bitcoin prices from previous halvings:
1. Bitcoin Halving on 28 November 2012
Reduced block reward from 50 BTC to 25 BTC.
BTC price at start of halving: $12
BTC price 1 year later: $964
Percentage increase: 7985%
2. Bitcoin Halving on 9 July 2016
Reduced block reward from 25 BTC to 12.5 BTC.
BTC price at start of halving: $663
BTC price 1 year later: $2550.
Percentage increase: 301%
3. Bitcoin Halving on 11 May 2020
Reduced block reward from 12.5 BTC to 6.25 BTC.
BTC price at start of halving: $8740
BTC price 1 year later: $58,250
Percentage increase: 540%
(Please not that all price data was sourced from Coinmarketcap.com)
Based on previous cycles, Bitcoin prices tend to increase after each halving event. While past performance doesn't guarantee future results, many investors believe Bitcoin prices may rise following the latest halving. However, the impact is debated. While some believe the event is already priced in, historical surges and the concept of stock-to-flow ratio suggest otherwise. Predicting the exact rise is much like guessing how high a rocket will fly - difficult. This time, Bitcoin reached its highest price prior to the halving, adding another layer of uncertainty. In the end, Bitcoin remains a volatile asset with significant short-term price swings. The halving serves as a reminder for investors to approach with caution, weighing potential gains against inherent risks.
What Happens When There Are No More Bitcoins?
When all 21 million bitcoins are mined, no new bitcoins will be created. Miners will no longer receive new bitcoins as rewards and will only earn income from transaction fees. Even though no new bitcoins will be made, people will still be able to use bitcoin to buy and sell things. Instead of getting new bitcoins as a reward for mining, miners will earn money from the fees people pay to use bitcoin. So, if bitcoin is mainly used as something people keep to save money instead of using it every day to buy things, miners could still make money by charging higher fees for processing transactions.
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Key Takeaways:
Bitcoin halving is a programmed event that reduces miner rewards every four years, creating scarcity and potentially increasing Bitcoin's value in the long run.
The halving can lead to short-term fluctuations in network hashrate as less efficient miners may be forced out.
While past halvings have coincided with price increases, investors should exercise caution and due diligence.
Disclaimer: Please note that this information isn't advice to buy or sell any financial products. Past performance doesn't guarantee future results, and we urge you to do your own research or seek professional guidance before making any investment decisions.
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