Bitcoin Halving: All you Need to Know

an image of bitcoin logo on a coin with charts surrounding it to represent bitcoin halving

On May 11, 2020, a halving of Bitcoin occurred. The next one is expected to take place by 2024. What is Bitcoin halving? How does this affect the Bitcoin system, price, and raise profits? What does bitcoin halving mean for miners? This article answers all your questions.

What Is Bitcoin Halving?

Bitcoin halving is the process of cutting the mining of or creation of new Bitcoin in half. It occurs every 210,000 mined blocks or approximately every four years until 21 million Bitcoins are mined.

A “block” is a file enclosing 1 MB of Bitcoin’s transaction data on the Bitcoin blockchain. 

Halving is remarkable because the limited supply of Bitcoin is further reduced. The maximum supply that Bitcoin can be is 21 million. Presently, 18,753,143.75 Bitcoins have been released via mining reward, so just 2,246,856.3 remains.

Every block received 50 bitcoins in 2009. Following the first halving of 2012, it fell to 25 and then to 12.5. Now, it’s 6.25 bitcoin per block from 11 May 2020.

Let’s suppose there is Gold halving, to explain in plain English. If every four years, the price of the gold extracted from the earth had been halved.  If Gold’s value is based on its shortage, then a half reduction in gold would increase its price every four years.

What Is Bitcoin Mining?

Bitcoin mining is people (miners) using their computers to process and validate transactions on the bitcoin blockchain network. Proof of Work (PoW) is a system used by Bitcoin for this purpose.

To be compensated, miners must demonstrate that they have put out effort into processing transactions. The time and energy required to run the computer hardware and solve difficult equations are included in this activity.

Faster computers generate larger block rewards with certain types of technology. Also, some companies have manufactured computer chips specifically for mining. These machines are in charge of processing bitcoin transactions and are compensated for their efforts.

The term “mine” is used in a figurative sense to refer to the process of gathering valuable metals.

Bitcoin miners actually tackle mathematical problems to verify a transaction’s authenticity. They then group these transactions into blocks and chain these blocks together to build the blockchain. 

The miners processing and confirming transactions within a block are rewarded with bitcoin when the block is packed with transactions.

To ensure security, transactions with a higher monetary value require more confirmations. 

Why Does Halving Occur?

Since you know what Bitcoin halving is, you are likely thinking: isn’t it unfair for miners who do all the hard work to dig in Bitcoin’s digital cave?

Die-hard Bitcoin investors know that Satoshi Nakamoto, the cryptic creator of Bitcoin, founded the currency with a limited amount of 21 million coins.

BTC has already produced 89.301% of its total supply as of this writing. It means there are just 2.2 million BTC available for mining. 

Unfortunately, there is no certainty that all 18.7 million Bitcoins produced are currently in circulation. In reality, according to a New York Times investigation, roughly 20% of BTC is in lost or blocked wallets and those amount to billions of dollars.

Anyways, miners will no longer earn block rewards once all 21 million Bitcoins have been mined. Fees for each transaction they confirm are the only way they can make money. 

While it is accurate that when Bitcoin is halved, the miners’ incentives are cut in half, Bitcoin becomes rarer due to its restricted quantity, and the value of one BTC continues to rise over time. 

Miners are also motivated to keep digging because of the rise in Bitcoin’s price.

Does Bitcoin Halving Matter?

a gif of the office movie with the caption: "oh, my God! okay, it's halvening"
Source: Coinmine

Bitcoin investors should note that halving often results in a considerable amount of cryptocurrency destabilisation.

It is obvious to know why: as the number of usable Bitcoins drops, the value of Bitcoins yet to be mined rises, and with those differences lies the potential for profits.

These bitcoin halvings have had a strong correlation with bitcoin price increases in the past. For instance, the first bitcoin halving occurred on November 28, 2012, when the price of bitcoin was $12. Then, it experienced a year-long increase from $12 to roughly $1,150.

The second Bitcoin halving took place on July 9th, 2016. At the halving time, the bitcoin price was $650 per coin, and by December 17th, 2017, it had risen to approximately $20,000.

Bitcoin was sitting at $8,787 at the time of the most recent halving, in May of 2020. Not so shockingly, its price exploded in the months afterward. 

There were certainly other factors to consider when discussing bitcoin’s increase following the halving, such as improved news coverage of cryptocurrencies and Bitcoin itself.

The next bitcoin halving in history is very certain to impact the bitcoin ecosystem in various ways. The number of bitcoin miners is projected to decline as the financial reward for mining becomes less profitable for less effective miners.

The halving is usually accompanied by a lot of excitement, anticipation, and fluctuation, and it is hard to anticipate how the market will react in the future.

What Makes Bitcoin Halving Outstanding for the Crypto?

If someone, a group, or the government is entrusted with creating the money supply, they must also be trusted not to tamper with it. 

Bitcoin is designed to be decentralized and trustless, with no central authority to hold accountable for the rise and fall of the price. Considering Bitcoin is not controlled by a single person or group, there must be strict guidelines for how many bitcoins are created and released.

The monetary structure of Bitcoin is virtually fixed in stone and practically difficult to change by adding a total supply and halving event into the Bitcoin code. 

This “hard cap” indicates that Bitcoin is a form of “hard money” similar to gold, with a finite supply that is nearly difficult to modify.

When There Are No More Bitcoins to Mine, What Happens?

The last of the 21 million bitcoins ever produced will be mined around the year 2140. The halving schedule will end at this point, as there will be no more new bitcoins to be created. 

On the other hand, Miners will be rewarded for validating and approving new transactions on the blockchain in the future since the value of transaction fees given to miners is expected to increase.

The cause for this is higher transaction volume with costs involved and a higher nominal market value of bitcoins.

What Is The Fate Of Bitcoin Miners?

Bitcoin miners spend on both specialized mining technology and the electricity needed to power their equipment. Their mining earnings cover the expense of this, but what happens if those rewards are halved?

Since this halving diminishes mining profits, miners’ incentive to work on the Bitcoin network decreases over time, resulting in fewer miners and less network security.

As a result, once the last Bitcoin is mined, miners will be rewarded in transaction fees for supporting the Bitcoin network.

Transaction fees now constitute a minor fraction of a miner’s earnings; miners presently mint roughly 900 BTC ($33.5 million) per day but earn between 60 and 100 BTC ($2.2 million to $3.7 million) in transaction fees. 

That indicates transaction fees will count for as little as 6.5% of a miner’s earnings. However, by 2140, they will have risen to 100%.

Before the final block is mined, it is also feasible that the Bitcoin reward mechanism will change. Bitcoin currently uses a proof-of-work consensus process, which Tesla CEO Elon Musk has chastised due to its high energy usage and carbon emissions.

Leading cryptocurrency competitor, Ethereum is transitioning from a proof-of-work consensus method to a proof of stake central authority, which secures the network by validators locking up, or “staking,” their virtual currency.

Niklas Nikolajsen, the founder of Swiss crypto broker Bitcoin Suisse, said in an interview, “I’m convinced if (proof of stake) technology is established, that Bitcoin will adapt to it as well.”

How Does Bitcoin Halving Affect The Price?

The controversy of whether Bitcoin halvings impact the cryptocurrency’s price or are already “priced in” is still raging.

According to supply and demand principles, the falling Bitcoin supply should raise demand for Bitcoin, causing prices to rise. 

The stock-to-flow model produces a ratio based on the current supply of Bitcoin and how much is entering circulation, with each halving impacting that ratio. Other investors, on the other hand, have questioned the theory’s basic assumptions.

The price of Bitcoin has historically grown after prior halving events — but not instantly, even though other variables have played a role.

Other reasons, such as rising institutional investment from the likes of MicroStrategy and PayPal‘s decision to allow its users to buy and retain Bitcoin, have also influenced Bitcoin’s bull run in 2020.

Can You Make Money From BTC Halving? 

Bitcoin is well-known for its violent market fluctuations. It is not impossible to make money out of it, whether after halving or not. 

If you are new to crypto trading, you can try keeping a watch on BTC’s price changes for a week or month to see when the best moment is to purchase or sell.

Always bear in mind that you will need a trusted crypto wallet and platform before you start trading. You can open an account on any exchange platform if you want to try your hand at Bitcoin trading.

Is Bitcoin Halving A Bad Thing Or A Good Thing?

You already know that Bitcoin halving has various effects on its market price, miners, traders, and investors and that it comes with its own set of perks and cons.

Like other valuable assets and commodities, Bitcoin’s price is determined by supply and demand. Nevertheless, for miners who receive a decreasing quantity of rewards every four years, it may not always be as compelling and appealing as the 50 BTC per block reward they could earn before the halving.

However, after more than a decade on the market, Bitcoin’s expanding recognition and global adoption are certainly driving up its price. Is this halving event beneficial or harmful to Bitcoin investors?

You have the answer!

How Bitcoin’s Supply Is Limited

The total number of Bitcoins available is restricted to 21 million. In other terms, it is naturally deflationary. As a basis, there can never be more than 21 million Bitcoins mined for life.

Other coins, such as Ethereum, have a steady stream of new assets introduced to their ecosystem, making them inflationary.

Examples of Cryptocurrencies with a Fixed Supply

Listed below are some examples of cryptocurrencies with a limited supply;

  • Bitcoin
  • Litecoin
  • Cardano
  • Stellar
  • Chainlink

Bitcoin

Bitcoin (BTC) is the most widely used cryptocurrency on the planet. Most investors’ go-to option has been Bitcoin in recent years, owing to a rapid rise in its demand and value.

Litecoin

a screenshot of the Litecoin website - a cryptocurrency with fixed supply like bitcoin

The cryptocurrency Litecoin (LTC) is a clone of the original Bitcoin project. It has a maximum supply of 84 million coins and provides faster transaction speeds and sustainability. Approximately 75% of its total supply is already in circulation).

Cardano

Cardano (ADA) is a cryptocurrency that is used to fuel a peer-reviewed software ecosystem. The maximum supply of this crypto asset, which goes by the ticker-symbol ADA, is 45 billion, making it one of the largest.

Stellar

a screenshot of the Stellar website - a cryptocurrency with fixed supply like bitcoin

Another cryptocurrency with a restricted quantity is Stellar (XLM). It can be used to settle payments on an individual level as well as across nations. It has a supply restriction of 50 billion units and is worth about $.40 per unit.

Chainlink

a screenshot of the Chainlink website - a cryptocurrency with fixed supply like bitcoin

Another noteworthy cryptocurrency with a fixed/limited supply is Chainlink (LINK), an Ehtereum-based token. The money, which has a value of roughly $30 per unit, may be used to create and run smart contracts. The maximum supply of Chainlink (LINK) is 1 billion.

Conclusion

It is not to say that coins with an endless supply have no value. Ethereum, for example, has no set supply yet is still the second-largest cryptocurrency in terms of market capitalization.

The main goal is to see if cryptocurrencies with a hard cap have a better probability of retaining their value than coins with an unlimited supply. The ultimate decision should be based on extensive due diligence that considers a variety of aspects in addition to supply structure.

If you have any further questions, please click this link for consultation. You can also subscribe to our email using the form below, so you get updates, resources, and insights on crypto investments.

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