The Bitcoin halving is one of the most pivotal events on the Bitcoin blockchain. It reduces the number of Bitcoin in circulation, resulting in an increase in the demand for Bitcoin. Previous Bitcoin halving events have resulted in significant boom and bust cycles which have pushed the price of Bitcoin significantly higher than what it was prior to the event. It also sends Bitcoin into a supply shock, as a drop in block rewards, and hodling by long-term holders sends demand through the roof. This article will help you understand Bitcoin halving, why it occurs, its impact on the price of Bitcoin, and its implication on investors and miners.
Bitcoin halving is scheduled to occur every four years, or every 210,000 blocks until all 21 million Bitcoin have been mined, sometime close to 2140. The halving reduces the number of new Bitcoin entering into circulation, while demand theoretically stays the same, possibly resulting in an increase in the price of Bitcoin.
Since its inception, Bitcoin has gone through three halving events, with the first one taking place in 2012, the second one in 2016, and the latest one in 2020.
The first Bitcoin halving reduced the reward for mining a block reduced from 50 BTC to 25 BTC.
The second halving saw the rewards drop to 12.5 BTC,
The third Bitcoin halving saw miner rewards slashed further to 6.25 BTC.
Bitcoin’s total supply is fixed at 21 million. In other words, there will never be more bitcoins than 21 million (unless the community decides to change the code).
The halving mechanism ensures that Bitcoin mined through block rewards decreases over a period of time, ultimately making Bitcoin more scarce, and increasing its value. Ideally, the incentive to mine Bitcoin should drop with each halving. However, halving events are preceded and followed by significant surges in the price of Bitcoin, providing miners with incentive to mine further, despite the drop in rewards.
If we observe the general pattern around Bitcoin halvings, they have coincided with significant price surges. Let’s take a closer look at each halving and understand the effect on the price leading up to the halving, and after the halving.
As you can see in the table above, each Bitcoin halving had a significant impact in the price of BTC. The first halving saw the price jump from $12 to $1217 a year later. Similarly, the second halving saw a huge jump in price, as the value rose from $647 to $19,800. The most recent halving saw an unprecedented jump in price, as the value of Bitcoin surged from $8787 to $54,276.
Looking at how the previous halving events have panned out, they are considered as good news for investors. The months leading up to the halving almost always sees a significant jump in trading activity, as investors look to purchase Bitcoin in anticipation of the event. However, the effect on miners and the larger ecosystem is not as straightforward. As halving reduces the block reward, fewer rewards could potentially make it difficult for individual or smaller mining operations to compete with larger mining operations. This could lead to a demand for more efficient technologies that could generate more hashes per second and consume significantly less energy.
The decreasing block rewards with every halving also lead to supply shocks. A supply shock occurs when there is a significant jump in demand, far exceeding the rate at which the asset is issued, causing the already available supply of it to dry up. In Bitcoin’s context, this means that the demand for Bitcoin is far greater than its rate of issuance (6.25 BTC), and the available Bitcoin across exchanges and brokers.
In April, the number of Bitcoin mined hit 19 million, leaving only 2 million for miners to mine. Around 900 new Bitcoins are mined each day and enter into circulation. Better mining equipment has also resulted in higher mining rates, which means the number could be more. With more halvings, the Bitcoin supply will slow down until all of it is mined, sometime around 2140. The next Bitcoin halving is scheduled to occur sometime in 2024, an event that would see the block reward slashed further to 3.125 BTC.
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