Impact Of Bitcoin Halving
Every four years, a major event is held in the cryptocurrency world. The number of bitcoin available in the market is reduced by 50%.
This is called the halving. Halving also means reducing the number of coins that miners are rewarded with for bringing new transactions to the blockchain to half.
The event this year took place on the 12th of May, 2020. On this day, the number reduces from 12 bitcoin to 6.2 bitcoin. In this article, we look at the impact of this halving. If you are ready? Let’s find out together.
Meaning of Bitcoin Halving
To determine when halving should take place, certain factors are considered. The most important of them is when the 210,000th block is mined. When this block is mined then the reward given to miners is ready to be cut in half.
Halving was created to make sure that there is less bitcoin available in the market. The idea is that when miners have the least bitcoin, they will not be willing to sell. This year’s halving was done on the 12th of May, however, it doesn’t have a specific date. That means it can be done anytime the 210,000th block is mined.
Bitcoin Halving Schedule
The schedule for bitcoin is block height, not on a date. This means that there is no fixed date for halving. Rather as soon as the number of the block is reached, the event takes place. Hence, the next halving of bitcoin is expected to take place in 2024.
Impact of Halving
Halving had been done twice before. However, many didn’t understand what the hype was all about. To understand the impact of halving, you need to look back on the history of bitcoin halving.
Pricing
One of the biggest impacts of halving is the price. The prices of bitcoin are greatly affected after each halving. The first bitcoin halving took place in 2012. The price of Bitcoins rose from $12 to over $650 per coin. This represents over a 1000% increase in price.
The second halving of bitcoin took place in 2016, after this particular one. The price rose to over $20,000 in 2017, barely a year later. However, it will be wrong to assume that halving alone was responsible for this jump in price.
Factors like increased awareness about the use and value of bitcoin should be considered. Although analysts have pointed out that halving of bitcoin is the major reason for this jump. For example, in hopes of another halving, prices have started picking up again.
The price of bitcoin has risen 30% in the past year. This is consistent with the previous halving carried out. Hence, bitcoin halving has a positive impact on prices over time. This has been the case historically.
Reduced inflation
Bitcoin functions by keeping its monetary value in the financial market. Halving is created to benefit this function of bitcoin by producing a supply shortfall. Every time halving is done, inflation, as it related to bitcoin, is reduced. Currently, inflation has dropped from 1.8%.
The inflation rate is similar to the inflation rate of gold, which is good news for those who have associated bitcoin as the “ gold” of the digital world because of its inflation rate as well as scarcity. In summary, a drop in the inflation rate of bitcoin will bring about stability in the financial system. This is because there is an increased awareness of the value of bitcoin.
Reduced number of miners
The current halving is expected to lead to a drop in the number of bitcoin miners. The reason for this is that halving affects the reward given to miners. Miners like most businessmen and investors go where the money is, halving reduces the economic reward miners gain from bitcoin mining. For less successful miners, this represents an unprofitable business.
One thing analysts suggest will happen is that the effect of halving will go beyond bitcoin itself. So miners of other cryptocurrencies will be affected. The reason for this suggestion is that bitcoin has great influence in the digital market globally. So halving can affect currencies like altcoins. The altcoin is an alternative to bitcoin. Therefore, if halving the price of bitcoins will in turn boost the price of other cryptocurrencies.
Why are miners rewarded?
Bitcoin won’t function without block rewards. With no block rewards for the miners, the network will be in complete disarray. One of the reasons is that when miners have enough power, they can attack the system in one of two ways.
Firstly, they can double-spend coins which will eliminate the object of halving. The second way is to stop this transaction completely. This will make it difficult for anyone to trade. The reason they won’t do any of these is that they have incentives given to them. The major one is block rewards which they don’t want to lose.
In summary, bitcoin theory is that bitcoin miners are rewarded to mine sincere blocks, and forfeit their money if they carry out any dishonesty.
However, as a result of halving, there are indications that a time will come when there will be no block rewards at all. This may sound incredible right now, but it is worth thinking about.
Is Halvening necessary?
Halving of bitcoin is necessary. The reason is that it is the way bitcoin controls its supply. Once the block subsidy expires, transaction fees will compensate miners for securing the network.
Conclusion
One thing investors and miners should be aware of is that no one is certain of what will happen after halving is done this time around. However, if we want a tie system to function for a long time we should be prepared for the worst-case scenario. Halving has lots of advantages, but it comes with its drawbacks as well.
