What is the Bitcoin Halving?
2020 marks the third Bitcoin halving event. In this article, we explain what the Bitcoin halving is, why it is important, what happens after the halving, and how you could potentially profit from it.
Every four years, the entire Bitcoin community gets hyped for one of the most significant events in the cryptocurrency ecosystem.
No, it is not a conference, rally or concert. It is an event that reminds us of the efficient kind of technology Bitcoin is and why it is different from traditional currencies.
This event is the Bitcoin halving.
The Bitcoin halving explained
In short, Bitcoin halving means that the inflation rate of Bitcoin goes down.
Bitcoin halving refers to the process of reducing the rate at which new Bitcoin units are generated.
Miners on the Bitcoin blockchain complete complex mathematical equations to confirm transactions on the network. Every 10 minutes, new Bitcoin blocks consisting of transactions confirmed by miners are created. Miners receive a reward for their work through the generation of new Bitcoin.
50 BTC was the initial reward for miners after every block. As part of the Bitcoin code, the amount of rewards giving to miners cuts in half in an event termed the “Bitcoin halving.”
This event happens every 210.000 blocks (about every four years). Previous Bitcoin halving events occurred in 2012 and 2016, respectively.
On January 3rd, 2009, the first Bitcoin was mined. 210.000 blocks later, the mining reward was cut in half from 50 BTC to 25 BTC on November 28th, 2012.
Similarly, the Bitcoin reward halved on July 9th, 2016, after another 210.000 blocks from 25 BTC to 12.5 BTC. In 2020, the block reward will change from 12.5 BTC to 6.25 BTC.
Why is it important?
The Bitcoin halving is at the core of Bitcoin’s economic module. This economic model ensures that the finite supply of Bitcoin rolls out steadily over a span of years, in such a way that it should push up the value of Bitcoin.
Unlike traditional currencies that can be printed at will and suffer from inflation, Bitcoin is a deflationary currency. It is scarce and increasingly difficult to mine; this is similar to gold.
Bitcoin halvings in the past have led to positive price sentiments and an increase in media coverage, creating hype around the event.
2020 has not been any different as several speculators have made numerous predictions for the Bitcoin halving this year.
Potential outcomes of the Bitcoin halving
Subsequent events that followed the Bitcoin halving in the past suggest that the halving does indeed affect the price of Bitcoin. Depending on how you look at it, short term or long term, the market eventually does react to a decrease in Bitcoin supply.
A possible explanation for this is the change in supply and demand dynamics. The Bitcoin price is highly affected by supply and demand.
Bitcoin currently has a lot of demand as it is used for speculation by traders, remittances, and even as a store of value. While the demand usually stays the same and also seems to increase over the long term, the supply decreases after every halving.
The primary source of Bitcoin supply is from miners. After the Bitcoin halving, the amount of Bitcoin miners can sell to the market is cut in half.
To sum it up, the Bitcoin price is affected after the Bitcoin halving due to a fall in supply. Whether the price will go up or down after the halving in 2020 is something no one can definitely predict.
How to benefit from the hype
Leading up to the Bitcoin halving, you could potentially benefit from predicting the Bitcoin price through Bitcoin futures without holding any Bitcoin.
You can enter a long position if you anticipate an increase in the Bitcoin price or enter a short position if you expect a fall in the Bitcoin price.
AAX offers a Bitcoin futures trading platform that allows you to trade with up to 100x leverage. You can sign up now to get started with Bitcoin futures.
Originally published at https://academy.aax.com on February 2, 2020.
