What is Bitcoin halving
Bitcoin halving: what is it in simple words
Why is Bitcoin halving necessary?
How does halving affect the Bitcoin rate?
November 28, 2012
July 9, 2016
May 11, 2020
In the cryptocurrency economy, the work of regulators is replaced by technical solutions implemented in computer code. For example, the entire emission of Bitcoin was initially planned during its development, and now no one can influence the process of generating new coins. In addition, the developers have created an algorithm to slow down the emission, which is called halving.
Bitcoin halving: what is it in simple words
The only way to issue Bitcoin is through mining. During this process, new coins are generated continuously at a predictable, controlled pace.
Mining involves people and organizations (miners) who perform complex mathematical calculations using special computers. New bitcoins are awarded to them as part of the reward for the work done (along with transaction fees). The size of this reward is also predetermined.
Halving is an artificial process of reducing the rate of production of new coins. As a rule, this is a twofold reduction in the miners' reward for mining a block. It is also called halving in the cryptocurrency community. In the case of Bitcoin, this happens every 210,000 blocks (approximately once every four years).
The bitcoin protocol initially had a preset maximum supply of 21 million BTC. Halving as part of this protocol ensures that new coins will appear at the planned rate, and when the maximum number is reached, the generation will stop.
It should be taken into account that the term “halving” applies only to blockchains that operate on the Proof of Work (POW) consensus mechanism - for example, bitcoin, litecoin, dogecoin, monero and others. In networks based on the Proof of Stake (POS) algorithm, halving is not provided in principle. In this case, emission control is possible only through the work of smart contracts or hard forks.
Why is Bitcoin halving necessary?
Halving stabilizes and slows down the generation of new coins. The presence of this function is one of the most important differences between cryptocurrency and fiat money.
In the traditional financial system, inflation depends on the decisions of regulators. They tend to increase the money supply, causing the currency to gradually depreciate.
In a cryptocurrency economy, the inflation process can be predetermined in advance, and, in the case of Bitcoin, due to halving it is constantly slowing down, and over time it will stop altogether.
The combination of these two factors allows many analysts to assume that cryptocurrency will constantly rise in price relative to fiat money, although due to high volatility this process will not be stable. In the future, digital assets may become a good means of preserving capital, even taking into account strong exchange rate fluctuations.
Another reason why halving is necessary is the ever-increasing hashrate (total computing power) of the Bitcoin network. This is due to the fact that as the market develops, miners use increasingly powerful equipment. This is why the Bitcoin developer created a network resilience mechanism:
When miner activity increases, the difficulty of mining also increases.
When mining dies down, its difficulty also decreases.
Thus, if after the halving miners decide that Bitcoin mining has become unprofitable, they will stop participating in this process, and the hash rate - and with it the difficulty of mining - will decrease.
This provides two important functions of the blockchain:
The frequency of adding new blocks remains at the same level (every 10 minutes).
The speed of transaction processing does not suffer due to the mass departure of miners.
In addition, this makes it possible to partially offset the losses of those miners who remain in the network despite the reduction in rewards, since they not only receive a profit for finding new blocks, but also retain commissions for confirming transfers in the network. Therefore, if the volume and cost of transactions remain high enough, the effect of reducing remuneration will be less pronounced.
On the other hand, too high a fee for simple computing operations would attract even more people to mining. As a result, the network hashrate would constantly increase at a tremendous rate, and this would have a detrimental effect on the blockchain.
How does halving affect the Bitcoin rate?
Initially, for each block mined, the miner received a reward of 50 BTC. By the beginning of 2023, three halvings had passed, after each of which this figure was halved.
November 28, 2012
The first halving took place on this day. The block reward has decreased from 50 to 25 BTC. After this, the cryptocurrency rate showed quite strong jumps:
Throughout 2012, the price of Bitcoin fluctuated from $4.5 to $14.
A year after the halving, in December 2013, the price of BTC rose to almost $1,200.
Then, over the course of two years, the rate rapidly declined and reached an intermediate minimum of $200 in 2015.
This spike in volatility is considered the first bull/bear market cycle in cryptocurrency history. Many investors took notice of this and began to factor halving into their strategies.
July 9, 2016
After the second halving, the reward decreased to 12.5 BTC per block. Market volatility has increased noticeably again:
In 2016, the Bitcoin rate fluctuated from $400 to $900.
By the end of 2017, the price of BTC had risen to $20,000.
The price declined over the next two years and reached an intermediate low of $3,500 at the end of 2018.
After this fall, Bitcoin managed to overcome the $20,000 mark again only at the beginning of 2021. This is currently the longest bearish trend in the history of the cryptocurrency market.
May 11, 2020
After the third halving, the reward decreased to 6.25 BTC per block. The market experienced increased volatility again:
Throughout 2020, the price of Bitcoin fluctuated from $3,500 to $12,500.
In 2021, the rate rose to $61,000, then fell to $31,000, and then rose again to $67,000.
The price then decreased throughout 2022. At the beginning of 2023, the BTC rate is just above the $20,000 level. It is still impossible to say for sure whether the downward movement will continue or the market will turn in the opposite direction. Most experts expect the price of Bitcoin to be between $15,000 and $30,000 in 2023.
The next halving is expected around April 19–21, 2024: the block reward will be reduced to 3.125 BTC. A total of 32 halvings are planned, which will occur every four years. Thus, the last one will take place around 2140.
To date, 19.3 million BTC have already been mined, or 92% of the maximum supply (21 million). By 2030, 97% of all coins will be mined. Detailed information and statistics on halvings can be viewed using a special service from the Binance exchange.
