Bitcoin Halving 2024: How it Works and Why It Matters
Bitcoin miners, whose computer processors enable the operation of the world’s most popular virtual currency, will soon confront an event that occurs every four years and has a significant impact on the profitability of the high-tech industry.
The term “halving” refers to the process through which cryptocurrency mining businesses and individuals learn of the lower payout they will get in exchange for their contribution to the system’s smooth operation.
Bitcoin was founded in 2008 as a peer-to-peer decentralised electronic currency system by a person or group writing under the pseudonym Satoshi Nakamoto.
The virtual unit was originally the domain of internet geeks and amateurs, but it has since grown in popularity, with mining carried out by massive banks of computers.
How does Bitcoin Mining work?
Bitcoins are exchanged via a blockchain, which is a decentralised record system. To handle and implement transactions, the system needs a vast computer processing capacity.
Miners offer such power intending to receive fresh bitcoins for confirming transaction data. The system employs a complex computer problem to determine which miner gets the privilege of validating the block and so collecting the reward.
“Each time a block of bitcoin transactions occurs, miners must verify them. The miner that confirms each block is rewarded for their efforts with extra freshly minted bitcoins.”
What is Bitcoin Halving?
This happens every four years and essentially includes half the payout for bitcoin mining. The first “halving” of the coin occurred in November 2012, and the second in July 2016.
Commercial mining operations sometimes occupy massive hangars or warehouses and demand substantial electricity to operate and cool the computers, which is a significant cost in addition to the equipment.
How much Bitcoin Halving has happened before?
The first Bitcoin halving occurred on November 28, 2012, reducing payouts to only 25 BTC. On this date, a single BTC would cost around $12. But consider where it was a year later. We can observe from the CMC archives that the price of Bitcoin was $1,031.95 on that date in 2013. That’s a yearly increase of 8,500%, the kind of gains that would make most Wall Street investors faint.
Let’s go back to the second halving in 2016 when payouts were going to be cut in half again, this time to 12.5 BTC. One coin cost $650.96 on the day Bitcoin reached 420,000 blocks — July 9, to be exact. Bitcoin was already worth $2,518.44 a year later. However, the big surge occurred five months later, on December 17, 2017, when Bitcoin reached an all-time high of $20,089. It just took 526 days to achieve a 2,990 per cent increase.
The judgement is still out on whether the impending half will be followed by the same sort of growth as the past halvings. In any case, it will take 12 to 18 months to see if Bitcoin can carry it off.
Why does Bitcoin Halving occur?
Bitcoin’s supply is restricted to 21 million units. When the total number of bitcoins reaches 21 million, the generation of new bitcoins will end. The halving of bitcoin guarantees that the number of bitcoins that can be mined with each block decreases, making bitcoin more scarce and, eventually, more valuable.
The motivation to mine bitcoin would logically decline with each halving.
However, bitcoin halvings are connected with massive increases in the price of bitcoin, providing miners with an incentive to mine more, despite the fact that their incentives have now been half.
Price rises encourage bitcoin miners to keep mining. On the other hand, if the price of bitcoin does not rise and block rewards are half, miners may lose the incentive to produce more of the digital currency. It’s because mining bitcoin involves a lot of processing power and electricity, which may be expensive.
Why Reduce the Bitcoin Halving Reward?
The payout was originally set at 50 bitcoins, but it was later decreased to 12.5. The quantity was gradually reduced in order to achieve a worldwide limit of 21 million bitcoins.
Bitcoin miners have received 6.25 bitcoins for each successfully mined block in 2022. The next Bitcoin halving will take place in 2024 when the block reward will be reduced to 3.125. Over time, the impact of each halving will diminish as the block reward approaches zero.
With the number of bitcoins obliged to reach the limit of 21 million ultimately, the digital currency’s creator(s) determined that these awards must decay exponentially; otherwise, supply will not be limited.
“So, the network is intended to cut the reward every 210,000 blocks, or roughly every four years,” Razaqzada explained, adding that the halved date was determined by mining activity.
Effect of Halving on Bitcoin Price
Lower supply with steady demand usually leads to higher prices in normal markets. Because the halving reduces the supply of new bitcoins while demand remains stable, the halving has typically preceded some of Bitcoin’s biggest runs.
From its inception in 2009, when it traded for cents or dollars, to April 2021, when it traded for more than $63,000, the price of one bitcoin has climbed gradually and considerably. Because halves the block reward effectively doubles the cost to miners, who are basically bitcoin producers, it should have a beneficial influence on pricing because producers will need to increase their selling price to cover their costs. Empirical research suggests that bitcoin values climb in anticipation of a halving, generally many months before the occurrence.
Summing up
Some investors regard bitcoin as a safe-haven asset, while others have surely purchased speculatively ahead of the so-called “halving” event in the hope that the cryptocurrency’s value will rise.
In crypto circles, the halving of Bitcoin is causing quite a stir. They are at the heart of cryptocurrency economic models because they ensure that coins are created at a consistent rate that decays at a predictable rate.
This limited pace of monetary inflation is one of the primary distinctions between most cryptocurrencies and traditional fiat currencies, which have an effectively endless supply owing to central banks’ monetary policies.
There will only be 32 Bitcoin halving incidents in total. No new Bitcoin will be issued when the 32nd halving is finished because the maximum supply of 21 million will have been achieved.
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