Bitcoin Halving – How Does the Halving Cycle Work and Why is it Important?
Bitcoin Halving- Why is the Halving Cycle Necessary and How Does It Work?
What is Bitcoin Halving?
On the Bitcoin blockchain, a “block” is a document that contains 1MB of Bitcoin (BTC) transaction data. The “miners” fight to create the next block by solving a complicated mathematical problem using specialized hardware, creating a random 64-character result known as a “hash,” finishing the procedure, and securing the block so it can’t be changed. Miners earn Bitcoin for finishing these blocks.
What is the Bitcoin halving cycle, and how does it work? When the coin was first launched, miners earned 50 BTC every block. Even before the network’s success was clear, early adopters would be motivated to mine it in this fashion. Every 210,000 blocks mined, or roughly every four years, the pace of production of new Bitcoin reduces by half until 21 million Bitcoin have already been mined.
The past three Bitcoin halving dates were in 2012, 2016, and 2020, as per the chronology of Bitcoin halving dates. Whenever the reward for mining a block was decreased from 50 to 25 BTC in 2012, it was the first Bitcoin halving.
After a halving event in 2016, the incentive for each generated block was decreased to 12.5 BTC, and effective May 11, 2020, every freshly mined block only produces 6.25 BTC. The second Bitcoin halving is projected to happen in 2024. This system will operate until about the year 2140.
We’ll go through why Bitcoin halving happens, how the Bitcoin halving cycle functions, and why it’s significant in this article.
Why Does Bitcoin Halving Take Place?
Every ten minutes, the Bitcoin mining process is intended to look for new blocks. While more miners connect to the network and contribute greater hashing power, the time taken to locate blocks will drop. The mining difficulty is adjusted once every two weeks or so to reset a 10-minute objective. As the Bitcoin network has evolved considerably over the last decade, the average time to discover a block has already been constantly below 10 minutes (around 9.5 minutes).
The total number of Bitcoins available is restricted to 21 million. When the overall number of BTC hits 21 million, the production of new ones will cease. Bitcoin halving assures that the number of Bitcoin that can be mined for each block falls over time, increasing the rarity and value of BTC.
When each half was done, the incentive to mine Bitcoin will logically decline. Bitcoin halves, but on the other hand, are linked to large gains in the value of BTC, providing miners with an incentive to mine further despite the fact that their rewards have been halved.
When the price of bitcoin climbs, miners are determined to continue mining. Miners, on either side, may lose motivation to generate additional Bitcoin if the virtual currency’s price does not rise and the incentives per block are cut. This is due to the fact that mining Bitcoins is a costly and time-consuming process that necessitates a large amount of computational power and electricity.
What is the Importance of Bitcoin Halving?
The halving of Bitcoin is frequently followed by a lot of volatility in the cryptocurrency market. The quantity of accessible Bitcoin reduces as a result of the Bitcoin halving cycle, raising the price of Bitcoins that have not been mined. With these developments comes the possibility of making money.
The first halving happened on November 28, 2012, once the value of BTC was about $ 12; a year after, Bitcoin had grown to almost $ 1,000. On July 9, 2016, the next halving took place, when the bitcoin price plunged to $ 670, before rising to $ 2,550 in July 2017. During December of the same year, Bitcoin hit a peak of almost $ 19,700. The price of bitcoin was $ 8,787 at the moment of the most current halving, in May 2020, and it surged in the months that followed.
There were, of course, additional factors to consider when examining post-halving Bitcoin booms:
- Increased media attention to cryptocurrencies and Bitcoin.
- An obsession with the digital asset’s anonymity.
- A progressive expansion in the currency’s number of real-world applications.
Previous Bitcoin halves, on the other hand, have been long-term positive drivers for the cryptocurrency’s price, if the narrative is to be believed. The third Bitcoin halving, on the other hand, is almost guaranteed to have a significant influence on the BTC ecosystem. The number of Bitcoin miners is expected to diminish as the economic advantage of mining becomes less appealing and, for much less capable miners, unfavorable.
The Bitcoin halving represents Bitcoin’s deflationary trend on a regular basis. Since its conception, this has been the foundation of the optimistic argument for Bitcoin: Bitcoin, as a decentralized cryptocurrency, cannot be issued into existence by governments or central banks, as the entire supply is completely known.
The Consequences of the Bitcoin Halving Event
In terms of halving’s larger consequences, a reduced mining reward will restrict the number of money miners may receive through introducing a new block to the blockchain. The circulation of new Bitcoin in exchange is determined by the incentives given to miners. As a result, halving these transactions limits the amount of new Bitcoin that enters the market. This is where supply and demand economics comes into play. Demand varies (increases or drops) when supply lowers, and the value changes as a result.
Bitcoin’s inflation rate has also decreased as a result of the halving occurrence. Inflation is the decline of something’s buying power, in this instance the currency. Bitcoin’s underlying infrastructure, on the other hand, is intended to become a depreciating asset. A key component in doing this is halving.
In 2011, Bitcoin’s inflation rate reached 50%, however after halving in 2012, it dropped to 12% in 2012 and 4-5 percent in 2016. Now it has an inflation rate of 1.77%. This indicates that the price of Bitcoin rises with each halving. Every halving occurrence in Bitcoin’s history has culminated in a bull run. As supply decreases, the price rises, driving demand to climb. This upward tendency, on the other hand, will not be quick.
Because of the exorbitant cost of electricity necessary to run the computers which answer mathematical puzzles, the value of BTC would have to skyrocket in order for miners to get half of the coins. Miners will struggle to stay competitive and in business if the value does not grow in tandem with the return.
Miners will have to be as effective as possible, hence a technological innovation that can create more hashes every second by using less power and lowering overhead will be in demand.
Additionally, there have also been indications of demand for the coin from a variety of countries, and the economy of these countries may have an impact on the value of Bitcoin. And, more crucially, Bitcoin’s price is expected to rise as a result of its greater awareness. As more retailers, small enterprises, and even big organizations adopt Bitcoin and the blockchain, the transaction volume will only increase.
What if a large proportion of miners dropped out of the race?
We must first discuss the hash rate in order to comprehend this. The hash rate is the number of SHA256 computing operations performed each second in Bitcoin mining. As when the count of miners grows, this value rises, indicating that the network is becoming quicker and more secure.
If a big number of miners quit at the same time, the network may encounter temporary congestion as users transfer to quicker chains, making it simpler for fraudulent users to gain access to huge portions of the network.
Historical data, on the other hand, demonstrates that halving occurrences does not elicit this reaction. Bitcoin’s hash rate declined somewhat from December 2012 to mid-February 2013 after the first halving in 2012. Following that, both the hash rate and the profitability of mining grew. As a result, after the dust settles, the halving will benefit both miners and the network overall.
During Bitcoin’s second halving, a similar scenario happened, but the positive effects took longer to appear. Although the hash rate increased rapidly, mining profitability did not recover for about a year after the halving date. Mining profitability may deteriorate in the long run if this trend prevails for the following occurrence.
When is the Next Bitcoin Halving Event Going to Happen?
Moreover, 18.5 million BTC have been mined and are still in circulation, accounting for about 89 percent of the 21 million BTC which may exist. Every day, some 900 new Bitcoins are mined and added to the digital currency, with quicker mining rates leading to greater mining rates, and there may be more.
The rate of increase in the quantity of Bitcoin will drop as the halvings continue until 21 million BTC have been mined; according to projections, final fractions of Bitcoin will be produced in 2140.
The cost of mining a block will be reduced once again in the future, although no timetable has been established. The solution will be disclosed when the 210,000th block has already been mined since the last halving.
Considering that a new Bitcoin is mined every ten minutes, the next halving is expected in early 2024, when a miner’s reward will be reduced to 3,125 BTC.