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What you should know about the halving of bitcoin


Have you ever pondered why the value of Bitcoin continues to increase gradually? One of the major causes is a process known as “Bitcoin halving”. In this blog post, we will investigate what the Bitcoin halving consists of, why it takes place, and how it influences the crypto market.

Short Summary

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  • Bitcoin halving is a process that reduces the rate of new BTC created
  • Past halving’s have had varying impacts on the market & mining landscape.
  • Anticipation around the 2024 Bitcoin halving is brewing, but key factors including potential demand changes, regulatory shifts, and miner adaptation strategies should be taken into consideration to better understand the effect on the crypto market as a whole.

Contents

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Bitcoin Halving Explained

(https://www.investopedia.com/bitcoin-halving-4843769, 2023)

Every four years or every 210,000 blocks the mining reward for validating transactions on the Bitcoin network is halved. As of writing this article, there are 19,412,225 Bitcoins in existence, with a total cap of 21,000,000 Bitcoins that will ever exist. Knowing about Bitcoin halving dates allows investors to gain better knowledge of how it impacts the price of BTC as well as its long-term sustainability.

Here are a few analogies to better understand this phenomenon:

  • Cake Slice: Imagine a birthday cake that’s cut into pieces for a party. At first, there’s enough for everyone. But as the party goes on, the number of cake slices is halved every hour. As long as guests still want cake, each remaining slice becomes more valuable because there’s less to go around
  • Apple Farming: The halving of Bitcoin is like an apple farmer reducing his harvest by half each year. As long as demand stays the same or increases, the fewer apples available each year makes each one more valuable.
  • Fishing Limit: It’s like a popular fishing spot suddenly cutting the daily catch limit in half. If demand for fish stays the same, each fish’s value will increase because they’re harder to get.

The Role of Mining in Bitcoin Halving

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Mining is a vital component of the Bitcoin halving process. Miners receive BTC as a reward in exchange for authenticating transactions and introducing blocks to the blockchain. The first reward issued was 50 BTC per block, but after the initial halving it got reduced by half.

Miners are responsible for preserving the security of the Bitcoin network. Reductions to supply through halvings boosts scarcity, contributes to value appreciation and slows down coin issuance rate.

Scarcity and Inflation Control

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The Bitcoin halving event every four years significantly reduces the amount of new Bitcoins that are released. This gives Bitcoin its status as an asset with limited supply and limits inflationary pressures on its value. People have different views about this design. Some argue that having scarce coins may lead to less people spending their Bitcoins with the expectation their worth will rise over time. Others recognise how Bitcoin is different from traditional currencies managed by central banks in which purchasing power declines over time due to inflation.

A Timeline of Past Bitcoin Halvings

(https://coincodex.com/article/22929/bitcoin-halving-dates/, 2023)

We can travel back in time and explore the three Bitcoin halvings which occurred in 2012, 2016, and 2020 to gain knowledge on how these events influenced miners’ rewards for mining a block, the cryptocurrency industry, as well as shaped the market price of Bitcoin.

The first reduction of the block reward from 50 BTC to 25 took place way back in November 2012 followed by an increase of its value from almost $12 up to more than $1000.

First Halving (2012)

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The first halving of Bitcoin took place on November 28, 2012 and slashed the block reward from 50 BTC to 25. When it started, Bitcoin prices stood at around $12, but they spiked up to $42 within a span of 100 days post this event. Within one year of its inception, there was an enormous rise in price as high as $964, reflecting that halvings have huge influence over Bitcoin’s value.

Second Halving (2016)

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The second halving of Bitcoin, which took place in 2016, illustrated yet again the power that these events can have on pricing. A price rise was witnessed ahead of the event before a short-term downturn followed by an exponential surge to its peak of approximately $25,000 in December 2017. This increase could be attributed to the increased acceptance of cryptocurrencies and the emergence of initial coin offerings (ICOs) during this time as well.

Third Halving (2020)

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When the third halving occurred on May 11, 2020, it decreased the block reward to 6.25 BTC and impacted both miners and users of Bitcoin in multiple ways. Transaction fees gained importance as an incentive for miners due to a lesser supply of new Bitcoins being produced. Despite this event not resulting in an immediate price increase – likely because external factors such as coronavirus – Bitcoin continued to spike to an all time high in late 2021 peaking at over $80,000.

Anticipating the Next Bitcoin Halving

As we approach the highly anticipated Bitcoin halving event in 2024, investors and enthusiasts are eager to analyse its potential impact on market rewards and mining. It is essential for us to take into account a range of factors that could shape the results such as demand for cryptocurrency, regulatory reforms, and overall conditions of this digital asset space. Demand has been an especially crucial factor when it comes to forecasting what may arise from the upcoming Bitcoin halving. As much remains uncertain with respect to the implications of reducing the Bitcoin issuance rate, understanding how all these influences affect Bitcoin will no doubt have major impacts moving forward.

Block Reward Reduction

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As the Bitcoin halving approaches, it is projected to decrease the reward miners receive per block from 6.25 BTC to 3.125 BTC. Miner’s may need to adjust their strategies and business operations accordingly so that they can remain profitable. Market conditions, laws/regulations also form a crucial part affecting how much influence it has on Bitcoin’s future trajectory, and should be considered in addition to the havening.

Bitcoin Halving Myths and Misconceptions

As the Bitcoin halvings become more well-known each year, so too do misconceptions surrounding them. To help clarify matters, we’ll dispel some of these popular misunderstandings by shedding light on what actually happens during halvings.

Guaranteed Price Increases

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When it comes to Bitcoin halving, there is a common misunderstanding that prices will always rise. Historical data does indicate this has happened in the past, yet no one can be certain of what future events may bring due to market demand and external factors like regulation or global economic conditions. It is important for those interested in investing not to look at historical increases as an assurance, but instead, weigh up all available data so they can make informed decisions.

The End of Bitcoin Mining

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The Bitcoin halving process has sparked a myth that it will eventually lead to the end of Bitcoin mining, because people think miners will not be incentivised once all 21 million Bitcoins are mined. This is an inaccurate assumption as miners receive transaction fees and these aren’t going away anytime soon.

As block rewards diminish over time on the Bitcoin network, transaction fees become increasingly important in providing incentives for miners who work hard to secure the ecosystem by processing transactions.

Summary

The Bitcoin halving event is a crucial factor that influences the crypto and mining environment by controlling how many new Bitcoins are generated while managing inflationary pressure. Having knowledge on this process and how it affects both miners and the network as a whole can assist investors to make more informed decisions. As we move closer to the next halving event in 2024, it’s essential to stay informed to maximise the chance of success in the crypto market.

Frequently Asked Questions

When is the next Bitcoin halving?

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The upcoming Bitcoin halving is projected to take place on April 26, 2024 at 07:07:17 PM UTC. The block reward will decrease from 6.25 to 3.125 Bitcoin per block. The halving reduces the rate of creating new Bitcoins.

Is Bitcoin halving in 2023?

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It is forecasted that the upcoming halving of Bitcoin will occur in April or May 2024 with a new block reward rate set at 3.125 BTC instead of 6.25 BTC per block.

How do miners adapt to reduced block rewards?

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Mining operations need to become more efficient, and miners may need to switch to more profitable alternatives in order to make up for reduced block rewards. Miners must take steps to reduce overhead costs, enhance their mining processes, and explore alternative sources of rewards such as transaction fees to remain profitable with reduced block rewards.

Sources


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