The history behind Bitcoin halvings

Bitcoin’s third halving, a once-every-four-years occurrence and the most anticipated event this year in the cryptocurrency industry, has finally happened. Let’s look at history behind previous two Bitcoin halvings.

Description: Bitcoin has just experienced a one-in-four-year event, its third halving, which has cut the miner block reward from 12.5 BTC to 6.25 BTC. What does it mean for cryptocurrency investors.

Bitcoin halving is one of the most anticipated events in the crypto world. On the one hand, Bitcoin is the “digital gold”. If BTC is doing well, the altсoins are doing just as well. On the other hand, рalving, presumably, may have a positive effect on the price of the first cryptocurrency. To prove this theory we must describe a few features of Bitcoin blockchain and dive deeper in the history of previous Bitcoin halvings.

What is halving?

There are currently approximately 18.37 million BTC in circulation, which is 86 percent of the maximum supply. But this does not mean that the cryptocurrency will soon reach its limit. From the very beginning, the blockchain protocol has been programmed to start an event called “halving” every 210 000 blocks. This is a reduction in the reward paid to miners for creating new blocks in the Bitcoin blockchain, which guarantees the network operation.

To be more precise: according to the protocol, the reward for a block is reduced by half. Thus, after each halving of Bitcoin, miners start receiving 50 percent less BTC for transaction confirmation.

What is mining reward?

To explain this in more detail, let’s turn to the basic structure of Bitcoin, the blockchain. A blockchain is a digital registry that stores information about all transactions in blocks of approximately 1 megabyte each. For example, if User A sends bitcoins to User B, that transaction is stored in the block along with hundreds of other transactions recorded around the same time period.

So the block reward is the amount of cryptocurrency that miner receives for creating a new block, i.e. finding a solution that will allow the block to be in the blockchain. This is a reward for his work.

From May 12, 2020 only 6.25 BTC are created with each block. It should be noted that miners also receive income in the form of fees, which users pay for transactions. So far, their share is relatively small, but in about 2030, most of the reward for miners will be in the form of fees, not reward for blocks.

History of previous halvings

Initially, the reward was eight times higher. After the launch of Bitcoin in 2009, miners received 50 BTC for each block. Thus, before the first halving, which took place in November 2012, 10 500 000 BTC were mined, after which the miners started to receive 25 BTC for each block.

It may seem that such a reward was too generous — about $500,000 per block at the current price, but then the network was just beginning to develop and no one knew for sure whether people would consider it justified to invest the computing power of their computers in the Bitcoin blockchain.

Also note that at that time the maximum market price for 1 BTC reached 31 dollars before June 2011, but then the “bubble” burst and at the end of the year Bitcoin returned to 2 dollars. However, as a result, the mining turned out to be much more profitable for those who joined at an early stage.

The second halving of Bitcoin took place on July 6, 2016 — on block number 420 000. Since then and until today, the miners receive 12.5 BTC for each new block.

The first two halvings in the Bitcoin network were accompanied by increased coin volatility. In November 2012, when the first halving took place, Bitcoin price was $11, but by the fall of 2013 it rallied $1100. However, later the price fell to $200. In July 2016, when the second halving took place, Bitcoin was worth $600, but after the 2017 halving, the cryptocurrency exchange rate rose sharply to a record $20 000 in mid-December, after which, as like in 2013, it collapsed sharply.

There is no consensus on the impact of the third halving. Some give fantastic forecasts of unprecedented growth, while others hold the view that no significant changes will occur, noting that past events may not happen again.

Is there any hope for Bitcoin price rise after the third halving?

Many analysts say that halving will cause bitcoin price to rise. And there are several reason to believe in it.

Price performance in the past

There are several circumstances that draw attention to themselves:

  • Bitcoin price growth did not start immediately after halving, but with some delay (1.5–2 months), during which even a dump is possible (almost 40% in the сase of second halving);
  • The price peaked after a relatively long period — from over a year after the first halving, to 2.5 years after the second one;
  • The increase was huge — 96 times in the first case and 62 times in the second.

It can, of course, be argued that “after” does not necessarily mean “because”, but what exactly indicate the historical data — is that halving does not lead to a fall in Bitcoin price. And there is no reason to expect that this time everything will be different.

Bitcoin is scarce

Bitcoin is scarce.

The number of bitcoins is constantly increasing due to mining, and consequently, there is inflation in the cryptocurrency. Currently, it is 1.8% per year. This is below the Federal Reserve’s inflation target in the USA (2%).

What does it matter? The price of any asset depends on its deficit.

In 2010, Satoshi Nakamoto wrote about Bitcoin:

“In this sense, it’s more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes. As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.”

There is such a mathematical model Stock-to-Flow (S2F), which establishes a connection between the ratio of “reserves” to the current “increment” of Bitcoin and its price using the function of the degree dependence: BTC = 0.18 * S2F ^3.3 (where S2F = 1 / inflation rate).

The Stock-to-Flow model well describes the dynamics of gold and silver prices as well.

It is clear that a scarce asset that can be transmitted through communication channels has value. This value is related to the deficit by the law of degree dependence. Halving will increase the deficit of Bitcoin, and therefore the price will rise.

There is a growing demand for Bitcoin

In 2020, Bitcoin began to acquire the properties of a safe haven asset, whose price rises with gold at moments when the world seems to be sliding into another economic crisis. This was the case during the U.S.-Iranian conflict and at the beginning of coronavirus outbreak.

These factors may have nothing to do with halving Bitcoin. But people warmed up by halving will respond to a decline in the supply of Bitcoin by increasing demand for it. The word “halving” appeared in mainstream media this May and sparked some interest in public.

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Andrey Costello

Bitcoin-maximalist. Optimistic family man and miner with six years of age. I write about complicated things from the future for people of our days.