Introduction
If you are a crypto enthusiast or keeping yourself updated with the latest news in the crypto space, you must have heard the term Bitcoin halving. The third Bitcoin halving took place on May 11th, 2020, and it is considered one of the most anticipated events in Bitcoin history. Ever wondered what it is about, and why is it important to know?
In this article, let’s understand the concept of halving and how the Bitcoin halving will affect the traders, miners, and long term Bitcoin investors.
What is Block Reward?
To understand the concept of Bitcoin Halving, we must know what a ‘block reward’ means in the Bitcoin network. It is a well-known fact that every ten minutes, a block is mined and added to the primary Bitcoin blockchain. For every block validated, a certain amount of Bitcoins are rewarded to the miners as incentives. This is known as a block reward. Hence, new coins are injected into the market every ten minutes once to maintain the supply.
Concept of Bitcoin halving
In literal terms, halving means ‘reduced by half.’ So in the Bitcoin network, what is reduced by half? Let’s see.
The block rewards are reduced to half at specific intervals to bring a balance in the supply & demand of Bitcoins. The process of reduction of these rewards to half is considered as halving. In the Bitcoin network, halving typically occurs once every 210,000 blocks are mined. We can also say that the incentives for the miners are reduced to half once every four years.
Why is it important?
The value of any commodity appreciates or depreciates depending on its supply and demand. This basic economics is vividly applied to the Bitcoin protocol. As the incentives reduce with time, eventually, they come down to zero. The Bitcoin whitepaper mentions that the rewards will get to zero once supply reaches the mark of 21 million. Hence, 21 million is the maximum number of Bitcoins that can ever exist in the cryptocurrency market. At this rate, it is forecasted that the last Bitcoin ever will be mined in the year 2140.
The halving timeline
In the beginning, the block reward in the Bitcoin network is 50 Bitcoins. That is, for every block mined, miners used to get an incentive of 50 Bitcoins for validating a block successfully. Then, the first-ever halving occurred on Nov 28th, 2012. This has reduced the block reward to half, and miners used to get 25 Bitcoins for validating a block. The second halving occurred on June 9th, 2016, and the block reward got reduced to 12.5 Bitcoins. This continued for the next four years until the third halving occurred on May 11th, 2020. Currently, the block reward is at 6.25 Bitcoin.
The Bitcoin halving event is considered one of the most anticipated events in the history of Bitcoin by most of the crypto traders and investors. Have you guessed the reason for this yet? The answer lies in the above illustration. Market experts believe that the halving will dramatically increase Bitcoin’s value as the supply decreases while the demand remains the same.
This assumption is historically proven to be true a couple of times. As we can see in the above illustration, there is a definite spike in the value of Bitcoin right after the occurrence of halving. In both instances, there is a double or even triple-digit percentage increase in Bitcoin’s value. This is the reason why traders and long term investors keenly look at the Bitcoin halving event.
Conclusion
It is crucial to know that the volatility of Bitcoin increases during the time of halving. So if you are a novice trader, you must refrain from Bitcoin trading in that period and only consider speculating the markets once you see a decrease in volatility. We are saying this because of the following reason — In the times of halving, the price shoots up as discussed, but the market will be in an overbought condition. The price corrections happen right after, and the market settles at a much higher price than it was before halving.
For instance, the price of Bitcoin was around $700 before the second halving. Then it has shot up to $20,000 and came back to ~$3,500 after the halving is done. This is the price at which we should be trading the market and not at $20k.
We hope you find this article informative and if you have any questions, please let us know in the comments below. Cheers!
