The A-Z of Bitcoin Halving
By on The Capital
The definition of Halving is quite self-explanatory, meaning literally dividing something ( or someone…which is not something we necessarily condone) into two equal parts. It could be as wild as the Kingsman-esque scene (where Sofia Boutella really had some dope kicks) to as simple as dividing a piece of cake for the mutual enjoyment of two people. Unless, of course, you divide them in half and eat the entire slice yourself. You get the picture.
The bitcoin halving phenomenon is exactly that (minus the grisly killing), where the amount of reward given to miners gets decreased to exactly half of what it was pre-halving. Still, confusing?
Allow me to explain via this hastily written list:
- At maximum, there can only be 21 million Bitcoins in the world. The reason the upper cap exists is to incentivise investors to buy into the currency because when Bitcoin was first introduced, its creator Satoshi Nakamoto had no idea whether it would end up being adopted by the Homo Sapien populace.
- Every bitcoin transaction involves a ‘miner’ ( not a minor). The transaction gets queued up in a ‘mempool’, from which miners take out the transaction, and if requirements are fulfilled, add it to the existing Bitcoin blockchain. This process might sound as simple as ‘extraction,’ but if anyone has watched the Chris Hemsworth movie on Netflix, they know it’s anything but.
- Since miners have to expend many resources to process transactions, they obviously need to be compensated. As such, they receive a block reward of a certain amount of Bitcoin for their “troubles.”
- Obviously, if they get rewarded for every block, miners will scramble to solve as many blocks as possible to get compensated. Money is how today’s society runs. Solving more blocks would mean, the supply of bitcoins, especially in its early days, would far outstrip the demand, generally making it worthless.
- Satoshi Nakamoto, being the smart alec he is, realized that something of this magnitude was bound to happen, thus adding an additional protocol to the mining process. As such, after every 210,000 blocks, Bitcoin achieves a ‘halving.’ This reduces miner rewards by half and thus reduces new Bitcoin supply by 50% as well.
Understand now? Great.
The world’s most well-known cryptocurrency has undergone 3 halvings in its 11-year history. The first took place on Nov 28, 2012 (luckily the Mayans were wrong about their Calendar, the movie was dope though), the second on July 9, 2016, and the third on May 11, 2020 (what a hell of a year). So approximately every 4 years, miners get fewer rewards, and thus new supply gets released slower.
By 2140, all of the 21 million bitcoins will be completely…uh…mined up. More importantly, 98% of the bitcoin supply chain will be mined by 2030.
So why is this Halving scenario tres importante?
That is based on simple demand and supply. After every halving, the supply of new bitcoin decreases by 50%. Lower supply, equal or higher demand, and boom (cue Michael Bay explosions) bitcoin price go up. The 2 previous halvings have always preceded stellar increases, with the first halving increasing the value by over 9300%. Yup, you read that right. If in 2012, you would have invested about a 1000 dollars in bitcoin, a few months down the line, u would 93000 dollars richer.
The 2016 halving saw about a 150 to 200% increase in bitcoin price in the following months. Not as stellar, but this was mainly because at this time, bitcoin was being more widely adopted, and most people had seen the effect of a ‘halving’ on their coin value, making them more incentivised to buy and hold before the halving period.
So what now in 2020? It has been approximately 9 hours since the historic event in Bitcoin’s lifespan. The price of the currently hovers in 8600 to 9000 USD price range. Obviously even in the previous 2 halvings, the jump in price was not instantaneous. But traders are more cautious now. More people have invested and/or transacting in bitcoin, but the reduction in mining rewards also means miners will be willing to offload their rewards for more capital. Additionally, 1 day before the halving, Bitcoin lost between 10–20% in value, thanks to a hangup on Coinbase servers, as well as many investors selling off their stocks in the anticipation of a post-halving depreciation.
What can be guaranteed is the situation for the next few days or even weeks will be worth monitoring. Bitcoin is poised to remain volatile in the short term, with experts claiming that the price will fluctuate between 7000 to 10000 USD.
The long term prospects, however, remain positive. Lower supply, higher demand, 21 million max cap slowly but steadily approaching, all these factors would mean that the price of bitcoin will climb up, perhaps reaching a zenith of 20,000 USD by the end of this year. This would mean that within the next six months, bitcoin could end up increasing in value by over 130%.
Not bad Mr. Nakamoto. Not bad at all.
