What is Bitcoin Halving? Will it Affect Price? Guide to this Mining Change

Bitcoin halving is an event that happens every four years or so, where the number of bitcoins produced by miners is cut in half. This happens as a result of the Bitcoin protocol, which stipulates that the block reward given to miners for creating new blocks will be halved every 210,000 blocks. This first happened in 2012, and again in 2016. This will happen again next year, most likely around May 2020.

What is the bitcoin halving? What economic impact does bitcoin have? The bitcoin halving is a big deal because it means that the amount of new bitcoins being created every day is going to be cut in half. This is a big deal because it will reduce the supply of new bitcoins, and that could lead to an increase in the price.

Understanding Bitcoin Mining Rewards

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Many watts of electricity are used for bitcoin mining every day. People mine bitcoin because they hope to earn bitcoin, which is a digital asset with a value that can be exchanged in various markets.

Mining is the process by which the network is secured and transactions are processed. It helps to ensure that the network is running smoothly and efficiently. In order to encourage people to mine bitcoin (or other cryptocurrencies that also use proof of work mining), each block contains a reward.

The reward is given to the miner who solves the block correctly. This reward should be large enough to provide a strong incentive. But the reward also cannot be too much. A large reward would cause an oversupply of currency, which would then lower the value of the currency.

What is the Bitcoin Halving?

Nakamoto’s vision for bitcoin was for it to be a self-sustaining system, in some ways similar to how gold is mined. This means that mining will become increasingly difficult and the rewards earned from mining will be reduced gradually, in order to control the supply. Specifically, Nakamoto writes:

“The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”

Nakamoto’s solution to this problem is to have a system where the number of bitcoins produced is halved over time. Here’s how it works.

When bitcoin started, the block reward was a whopping 50 bitcoin every 10 minutes.
The bitcoin code includes a statement which says that after every 210,000 blocks (or about four years, given 10 minutes per block) this reward should drop by half.
Following the last two bitcoin halvings, the current block reward is now 12.5 bitcoin. In the year 2020, it will be 6.25, and so on.

In this way, the bitcoin halving has a number of important effects on the network:

First, it extends the life of the reward system. If we were still releasing 50 bitcoin every 10 minutes, then we would reach the maximum supply cap of 21 million bitcoin rather quickly. In fact, mining rewards would cease in about 8 years. Reducing the reward rate over time slowly means that there will be a longer period of time in which mining results in receiving a block reward.
Secondly, bitcoin halving helps bitcoin see steady price increases over time. This is because the number of new bitcoin that appear each year will be decreasing. This limited supply causes bitcoin prices to increase, as their scarcity also increases proportionally.
Finally, the bitcoin halving increases the cost of mining each individual bitcoin. As the network difficulty increases over time, and the reward rate drops, the actual cost of mining each bitcoin increases, which then causes the trading price of each bitcoin to increase as well.

How does Bitcoin halving work?

As part of Bitcoin’s coin issuance, miners are rewarded a certain amount of bitcoins whenever a block is produced (approximately every 10 minutes).

When Bitcoin first started, miners were given a reward of 50 Bitcoins per block. A block on the Bitcoin blockchain is a file that stores transaction records. Each block is worth 1MB.

Mining is the process of adding blocks to a blockchain. Miners use specialized hardware to solve a difficult mathematical problem, producing a random 64-character output called a “hash.” This process locks the block so it can’t be changed. Miners earn bitcoins by completing these blocks.

When the cryptocurrency was first released, miners were rewarded with 50 bitcoins for every block they mined. This would incentive early adopters to mine the network even before knowing if it would be successful or not.

This is what is known as the halving event. The mining reward will continue to halve until it reaches 0.

The block reward is currently 6.25 coins and will be halved to 3.125 coins after the next halving.

The Day the Mining Stops

What is the logical question that this leads us to? What happens when the bitcoin reward drops to zero? If everyone were to stop mining bitcoin, the network would come to a complete stop.

To address this concern, we must take several factors into consideration.

The final bitcoin will be mined in 2140 based on the current mining rate and future halving events.

This means that the network will operate for a total of 130 years before it needs to be replaced. The economic conditions of cryptocurrency may be so different by that time that a block reward may not be necessary.

Another aspect to consider is that bitcoin miners have another source of income in addition to the block reward. Specifically, miners also earned transaction fees. My rough translation: On any given day, a large number of bitcoins are paid out in transaction fees by various users (the number varies depending on network conditions).

It is possible that miners will still be mining in 2140 even though there is no block reward. This is because mining purely for transaction fees could be profitable enough for miners to continue mining indefinitely. In his widely reviewed white paper, Nakamote describes it like this:

“Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.”

New Projects

Another thing to consider is that there are new projects being released that plan to exist alongside the bitcoin blockchain.

One example of this is the RSK platform. The RSK smart contract platform is designed to run on top of the Bitcoin network. This will enable the execution of smart contracts and decentralized applications, while making use of the bitcoin blockchain. It is intended to be a competitor to Ethereum.

One of RSK’s advantages is that miners who want to help process RSK transactions can do so while still mining Bitcoin normally, with only a small drop in efficiency.

This means that in the distant future, miners could not only earn transaction fees from the bitcoin network itself, but they could also potentially earn transaction fees from these additional layer networks that may exist on top of the bitcoin network. For example, RSK.

What Do Analysts Think of the Bitcoin Halving Effect on Price?

Some believe that this could be the beginning of the end for Bitcoin, while others believe that this event will have little effect Analysts are currently debating what implications the recent event will have for Bitcoin. Some believe that it could signal the beginning of the end for Bitcoin, while others believe that the event will have little effect. Some people believe that the current market situation is good for investment, while others believe that it may not have much effect either way, or that it may become unfavorable if certain events occur.

The Bull Argument

According to Alistair Milne of Altana Digital Currency Fund, 50% of all newly mined Bitcoin will be bought by clients of two companies – Grayscale through its Bitcoin Trust and Square through its BTC buying service – after the halving comes into effect in 2020.

This does not take into account the money coming in from Coinbase customers, people buying cryptocurrency through RobinHood and eToro, and so on and so forth.

This means that if there is high demand or if it increases, the halving will decrease the supply which will then cause prices to go up.

This means that, according to the highly accurate stock-to-flow model, BTC’s market capitalization is expected to reach $1 trillion following the 2020 halving. This correlates with a $50,000 price per each coin.

The Bear Argument

” Jason Williams, co-founder of digital asset fund Morgan Creek Digital, said at the beginning of the previous month that one of his less popular opinions is that the Bitcoin halving in May 2020 won’t have any effect on the price. It will be a non-event.”

Some people in the cryptocurrency industry believe that the halving event (when the reward for mining Bitcoin is cut in half) will lead to a Bitcoin price increase. However, Bitmain’s CEO Jihan Wu has said that there is no guarantee that this will happen.

An analysis of data on 32 halvings across 24 crypto assets found no clear evidence that crypto assets that see their emission halve outperform the broader market in the months leading up to and following a reduction in miner rewards.

Does It Even Matter For Bitcoin?

Some analysts feel that the halving will positively impact Bitcoin’s future price while others feel that it doesn’t matter. Some people in the cryptocurrency industry believe that the technology is progressing well, even if Bitcoin’s halving event doesn’t go as planned.

Global Coin Research’s “Community Predictions for 2020” report cites many industry executives, including Changpeng “CZ” Zhao, who is the CEO of Binance, one of the top crypto companies. CZ believes that the overall outlook for Bitcoin and other cryptocurrencies is positive. He elucidated:

” Bitcoin’s small market cap means it will experience high volatility in the short term. Cryptocurrencies like Bitcoin are here to stay for the long run, according to the fundamental technology involved.

Andy Bromberg, co-founder of CoinList, said in an interview with Bloomberg that in his opinion, there has not been this much activity in the crypto market since 2017.

5 Bitcoin Halving Effects

Although Satoshi Nakamoto never gave a full explanation for why he capped the supply of Bitcoin at 21 million units, some people think it might be because he started with a block subsidy of 50 BTC, which is halved every 210,000 blocks.

However, history has shown that there is often a spike in price six to twelve months after each halving The incentive for mining bitcoin falls with each halving, but history has shown that there is often a spike in price six to twelve months after each halving. Although bitcoin halvings reduce the reward miners receive, they are still incentivized to mine because the price of bitcoin usually surges afterwards.

In contrast to regular currency, which can be used to purchase items, cryptocurrency loses purchasing power over time as more of it enters circulation. With central banks and governments in control of how much cryptocurrency is produced, it’s unlikely that this will change. Since there is only a set amount of Bitcoin, it cannot be devalued through inflation like traditional currencies.

Although the halving mechanism was created by Satoshi, all of Bitcoin will be mined by 2016. The halving mechanism acts as an incentive for miners to continue mining for the next hundred years. We’re discussing the five effects that each halving has on Bitcoin as a whole.

If you are interested in learning more about Bitcoin, we have written a guide on it here: What Is Bitcoin & How Does It Work? The Beginner’s Guide for 2022.

1. Price of Bitcoin

There is an interesting price pattern that has been observed during Bitcoin’s “Halving Cycles.” In the past, both leading up to and immediately following halving events, Bitcoin price has experienced a Bull Run.

These bull runs have been followed by crashes. The crashes are followed by long periods of time where people are not interested in Bitcoin and major news networks do not talk about it. Until the next halving cycle starts the process again.

Want to know more about Bitcoin’s history? We’ve written a post comparing Bitcoin and Bitcoin Cash, highlighting the key differences investors should be aware of.

2. Inflation rate

Halving brings down bitcoin’s inflation rate. The infrastructure of bitcoin is designed to make it a digital asset that decreases in value over time.

Halving helps keep inflation in check by, for example, reducing the inflation rate from 50% to 12% after the first halving, and from 4-5% after the second halving. The inflation rate decreased to 1.76% in the third halving. The value of bitcoin goes up after every halving.

Historically, after every halving, bitcoin experiences a bull run. As supply decreases spurring the demand, the price surges. However, this uptrend is not immediate.

After looking at the past three times the halving happened and the prices went up afterwards, it is estimated that usually the big price increase happens three to six months after the halving, not right away.

3. Scarcity

Scarcity lies at the heart of Bitcoin. There will only ever be 21 million Bitcoins mined. The majority of Bitcoin has already been mined, with the rest to be mined until 2140.

Mining involves taking 1 megabyte’s worth of transactions and putting them into a block, as well as collecting the transaction fee. With every new block, an associated “block reward” is unlocked.

Block rewards are how new Bitcoins are mined. Mining will continue as long as miners are willing to process transactions and earn fees and rewards.

Prior to Bitcoin’s launch, there were 100,000,000 BTC in existance. The Bitcoin block reward was cut on November 28, 2012, from 100,000,000 BTC to 25 BTC per block. The block reward for Bitcoin was cut in half on July 9, 2016, to 12.5 BTC per block.

The block reward was halved on May 11, 2020. The current block reward is 6.25 BTC per block. The next time the block reward will be reduced will be in the spring of 2024 when it will be reduced to 3.125.

We have written a guide about blockchains if you want to know more about them. Everything Beginners Need to Know.

4. Good or bad for miners?

Currently, transaction fees are significantly lower than the block reward, at around 0.6 bitcoins, or $5,000, per block. This would mean that a miners’ income would suddenly be reduced by almost half.

When the rewards for mining crypto suddenly decline, it becomes a lot less profitable. If the price of bitcoin does not significantly increase, miners will likely stop investing in new mining hardware for a few months.

Some bitcoin miners might turn off their less efficient mining hardware if it becomes unprofitable enough because it isn’t generating enough bitcoins to cover operating costs.

As miners’ profits from bitcoin mining decrease, the bitcoin network’s energy consumption is likely to fall as well. This can be interpreted to mean that less money being earned by miners would lead to less energy being consumed for mining purposes.

5. The hash rate

In order to understand this, we need to talk about the hash rate. The hash rate is the number of SHA256 computing operations executed per second for Bitcoin mining.

The value of the cryptocurrency rises as more miners join the network, which implies that the network is faster and more secure.

If a large number of miners leave the network at the same time, it may slow down for a short period of time as users move to faster chains. This could make it easier for dishonest users to control a large part of the network.

Although it may appear that halving events cause this reaction, historical evidence suggests otherwise. Between December 2012 and mid-February 2013, Bitcoin’s hash rate experienced a slight decline.

Following that, both hash rate and mining profitability increased. This means that halving is advantageous to both miners and the network as a whole once the dust settles.

This happened before with Bitcoin’s second halving, but it took a while for the good effects to show.

The hash rate is the speed at which a cryptocurrency is being mined. The hash rate continued to rise steadily after the halving, but mining profitability did not recover for nearly a year. If the current trend continues, mining profitability may suffer a long-term decline.

Conclusion

With all that in mind, let’s go over what the bitcoin halving really means for bitcoin. The main purpose of Bitcoin mining is to regulate the release of new Bitcoin into the market. The Dinar is meant to stop hyperinflation from ever happening.

One thing that often leads to hyperinflation is the rampant and uncontrolled printing of money. When a government printing more money, it causes inflation which reduces the purchasing power of the currency.

The bitcoin halving is designed to ensure that the production of new bitcoins will never ramp up, but will actually decrease over time. This is because it is mathematically required that the reverse should occur.

The bitcoin halving aims to make mining more difficult over time, similar to how gold-mining becomes increasingly expensive and difficult as more of the Earth’s gold reserves are depleted. As gold becomes more expensive, less of it enters the marketplace each year. The price of gold has predictably and steadily risen over the last century.

Since the launch of bitcoin, many other altcoins have implemented their own version of bitcoin halving. 25 ETC Vertcoin and Ethereum Classic both recently had their halving events, where Vertcoin dropped its reward from 5 to 4.25 ETC.

Other cryptocurrencies do not have the same model of supply reduction as Bitcoin, but they employ their own methods of ensuring that the amount of new tokens hitting the market each year is slowly on the decline.

The bitcoin halving is a process that keep prices steadily moving upward over time. ‘,If the bitcoin halving had not occurred, bitcoin might only be worth 50 or a hundred dollars each rather than the thousands that it is worth now.