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The first and most well-known cryptocurrency, Bitcoin revolutionized the financial world by introducing a decentralized, peer-to-peer digital currency system that operates independently of central banks and governments. It utilizes blockchain technology to ensure secure and transparent transactions.
This year, 2024, we will hear a lot of about halving bitcoin. However, most traders do not know this term.
What is Bitcoin Halving?
Bitcoin halving is a significant event that occurs every 210,000 blocks, approximately every four years. It reduces the reward for mining new blocks by half, which means miners receive 50% fewer bitcoins for verifying transactions. The purpose of halving is to limit the supply of new bitcoins, creating scarcity, which could potentially drive up the price if demand remains steady. This process will continue until the maximum supply of 21 million bitcoins has been reached.
The 2024 Halving
The next bitcoin halving is expected in April 2024, when the block reward will decrease from 6.25 to 3.125 bitcoins. Investors and traders anticipate This event with interest, as previous halvings have led to notable price movements. The exact date cannot be predicted precisely due to the variable time taken to mine blocks, but it’s scheduled to occur at block 740,000.
Please see Table When is Bitcoin Halving dates:
| Bitcoin Halving | Date | Bitcoin Block number | Bitcoin Block reward | Total new bitcoins between events |
|---|---|---|---|---|
| Bitcoin launches | 3 January 2009 | 0 (genesis block) | 50 new BTC | 10,500,000 BTC |
| First halving | 28 November 2012 | 210,000 | 25 new BTC | 5,250,000 BTC |
| Second halving | 9 July 2016 | 420,000 | 12.5 new BTC | 2,625,000 BTC |
| Third halving | 11 May 2020 | 630,000 | 6.25 new BTC | 1,312,500 BTC |
| Fourth halving | Expected April 2024 | 740,000 | 3.125 new BTC | 656,250 BTC |
| Fifth halving | Expected 2028 | 850,000 | 1.5625 new BTC | 328,125 BTC |
Why Does Bitcoin Halve?
The concept of bitcoin halving was integrated into the Bitcoin network by its creator, Satoshi Nakamoto, to control the supply of bitcoins and introduce a deflationary feature into the currency. It’s speculated that the halving events were designed to distribute bitcoins more quickly initially to incentivize participation and investment in the network and then slow down the distribution as the network grows, ensuring a predictable and limited supply.
The Bitcoin halving mechanism is a critical component of the cryptocurrency’s protocol designed to control the rate at which new bitcoins are created and introduced into the system, ultimately ensuring a predictable and limited supply. This mechanism is deeply rooted in Bitcoin’s goal to create a deflationary currency, as opposed to the inflationary nature of traditional fiat currencies. The technical rationale behind the Bitcoin halving event encompasses several key aspects:
Controlled Supply
Bitcoin’s total supply is capped at 21 million coins. This fixed supply mimics scarce resources like gold, providing a hedge against inflation. By implementing halving events, the rate at which new bitcoins are generated and released into circulation is systematically reduced every 210,000 blocks or roughly every four years. This gradual reduction ensures that the final bitcoin won’t be mined until around 2140, providing a long-term schedule for supply issuance.
Incentive for Miners
Miners are crucial to the Bitcoin network, as they perform the computationally intensive work required to secure the network and process transactions. Miners are rewarded for their efforts with block rewards, which consist of newly minted bitcoins and transaction fees. The halving reduces the block reward, thus controlling the rate at which new bitcoins are rewarded to miners and encouraging efficiency and technological advancement in mining operations.
Network Security
As the block reward decreases over time, the network’s security transitions from being predominantly incentivized by new bitcoins to being supported more by transaction fees. This shift is crucial for maintaining the security and operational continuity of the Bitcoin network once the block reward becomes negligible. It ensures that miners are still compensated for their contributions to network security through transaction fees, even when the issuance of new bitcoins ceases.
Economic Model
The halving events are integral to Bitcoin’s economic model, creating an automated economic system. By reducing the supply of new bitcoins, the halving events introduce scarcity, which can have deflationary effects on the currency’s value. This model contrasts with traditional fiat currencies, where central banks can print money without limit, potentially leading to inflation.
Market Sentiment and Speculation
Although not a direct technical effect of the halving, the anticipation and aftermath of these events often lead to significant market speculation and sentiment shifts. Traders and investors closely monitor halving events, leading to potential price volatility based on expectations of supply and demand dynamics.
How Bitcoin Halving Impacts Miners?
Post-halving, the profitability of mining can decrease for some miners due to reduced rewards unless there’s a compensatory increase in bitcoin price. This might lead some miners to cease operations, temporarily affecting the network’s hashing power. However, the network is designed to adjust the mining difficulty to maintain a constant block creation rate, ensuring the network’s continuity and security.
- Reduced Block Rewards: Miners receive 50% fewer bitcoins for each block they mine following a halving event. This directly impacts their revenue, assuming the bitcoin price does not increase proportionately.
- Increased Operational Costs Relative to Rewards: As the reward for mining a block is halved, the relative cost of mining (electricity, hardware depreciation, etc.) may not decrease, leading to reduced profit margins for miners.
- Potential Exit of Less Efficient Miners: Miners with higher operational costs or less efficient mining equipment may find it unprofitable to continue mining post-halving. This can lead to a consolidation in the mining industry, with only the most efficient operations remaining viable.
- Security and Hash Rate Fluctuations: The exit of less efficient miners can temporarily reduce the network’s total hash rate as the computational power dedicated to mining decreases. However, the difficulty adjustment mechanism ensures long-term stability by making it easier to mine new blocks, thereby incentivizing new or remaining miners.
- Price Dependency for Profitability: The impact of halving on miners heavily depends on the bitcoin price. Higher revenue per bitcoin can offset the reduced block reward if the price increases significantly around or after a halving. This can maintain or even increase miner profitability despite the reduced block reward.
- Investment in More Efficient Mining Technology: To remain competitive, miners may invest in more energy-efficient mining technology, reducing operational costs and increasing the likelihood of profitability.
- Increased Importance of Transaction Fees: As block rewards diminish over time, transaction fees (paid by users to have their transactions included in a block) become a more significant portion of a miner’s revenue. This will be increasingly important as an income stream for miners, especially after the final bitcoin is mined.
- Network Security Considerations: In the short term, halvings can reduce hash power and potentially have security implications. However, the Bitcoin network is designed to adjust the difficulty of maintaining a target block time, ensuring long-term security and functionality.
Effects on Bitcoin’s Price
Historically, bitcoin’s price has seen significant increases in the periods surrounding halving events, driven by the reduced supply of new bitcoins entering the market. However, the exact impact of future halvings, including the 2024 halving, on Bitcoin’s price is uncertain. It will depend on various factors, including demand, market sentiment, and broader economic conditions.
Bitcoin halving events reduce the rate at which new bitcoins are generated, cutting the reward for mining a block in half. If demand remains constant or increases, this decrease in supply can lead to an increase in Bitcoin’s price due to the scarcity effect. Historically, anticipating this reduced supply has led to price increases before the halving occurs, as investors speculate on the impact of the reduced new supply entering the market. However, the actual impact on Bitcoin’s price post-halving can vary, influenced by broader market conditions, investor sentiment, and levels of adoption. In the long term, halvings have been viewed as bullish events for Bitcoin’s price, contributing to its cyclic patterns of reaching new highs followed by corrections.
Future of Bitcoin Post-Halving and Mining
After all, by around 2140, 21 million bitcoins had been mined, and miners will no longer receive block rewards but will continue to earn from transaction fees. This shift is expected to sustain the mining ecosystem, securing the network while introducing a deflationary aspect to Bitcoin as the supply becomes fixed and potentially lost bitcoins (due to errors) subtly decrease the circulating supply.
Please see my video from April 20. 2024:
Investors and traders can engage with the bitcoin market through strategies around halving events, including directly purchasing bitcoins or using derivatives like CFDs to speculate on price movements. The anticipation and aftermath of halving events can introduce volatility and trading opportunities in the market.
Conclusion
Bitcoin halving is a foundational aspect of the cryptocurrency’s economic model, influencing supply, incentivizing miners, and potentially impacting market dynamics. While the precise effects of future halvings on the market remain speculative, they are pivotal moments that draw significant attention from the cryptocurrency community.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
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