What Is Bitcoin Halving & How Does It Impacts Miners & Investor Psyche?
Every four years, the amount of Bitcoin awarded to miners is halved. This event is known as BitCoin halving. We will explore this today.
- The Bitcoin halving is an event where mining rewards are cut in half.
- This halving of rewards occurs every four years.
- This logic of cutting down the reward by half every 4 years comes pre-coded into Bitcoin’s blockchain protocol.
Bitcoin is rightly touted as a store of value and is seen as digital gold by many crypto investors & enthusiasts. One of the contributing factors that makes it a valuable asset to hold and preserve is its Reward halving cycle. This event makes it more scarce and increases the demand due to supply shock, which creeps up.
Today we will look into this unique phenomenon and understand how it functions and why it enhances the Bitcoin value.
What Is Bitcoin Halving?
Before we delve deep into this question, we need to understand what are the underlying technology which powers the bitcoin network. So we will cover the following concepts briefly
- Blockchain Network
- Bitcoin Mining & Proof-Of-Work
Bitcoin Blockchain Network Working :
Bitcoin’s blockchain network consists of hundreds and thousands of nodes(computers) that run the bitcoin client (mining ) software, these nodes stores all the transaction history across the network. These nodes are owned by common people or businesses and are distributed across the globe. The key role of these node owners is to approve or reject any transaction in the network.
How do they verify the transactions?
Every node who participates in the blockchain network as a miner runs a mathematical operation and performs a series of checks to validate the transaction for correctness. They check all the parameters in consideration are valid. For example, nonces of the concerned transaction should not be exceeding the length of the block, which is pre-defined as a rule in the blockchain.
If anyone node successfully validates the correctness of the information, this information becomes a part of a new block and is broadcasted across the blockchain network of nodes. After everyone in the node approves that yes information exists, then only the transaction goes through successfully, and a new block becomes a part of the legacy bitcoin blockchain.
Every user who owns required computer hardware and has software installed to run a bitcoin client, and if he plugs his node in the blockchain network, he is treated as a miner. These miners engage in the network to process the said transaction and validate it for correctness, this process is known as BitCoin mining.
Now that we have understood the bitcoin mining concept, we also need to discuss the consensus mechanism which is employed in the blockchain network to validate the transaction and proof the same that it has been done.
- Proof of work (PoW) is a blockchain consensus mechanism that requires every node members of a network to put significant effort into solving an arbitrary mathematical question to prevent anybody from fooling the network
- This Proof of work is used majorly used in the crypto mining world, to validating transactions and mining new tokens(as a reward for the effort )
So now the bigger question here is why anyone would like to participate in the resource-intensive blockchain network putting his energy and money to validate the transaction and mine the block.
Rewards: Drive the miners
The answer lies in the lucrative mining reward, which is handed to the miners for authentic and successful block mining against the said transactions. Miners get back. But it is not as straightforward as it sounds.
The value of rewards depends upon the capacity and quality of mining hardware. The more power and hard work which gets into the mining process leads to higher rewards.
Bitcoin mining process to get new bitcoin out of the code is the digital equivalent to the physical work done to pull gold out of the earth.
Now that you are aware of all the technology in play, it’s time to revisit our BitCoin Halving concept and see how it works.
How Does Bitcoin halving works?
As discussed earlier, bitcoin halving occurs after every four years. Bitcoin’s most recent halving took place on May 11, 2020.
Bitcoin block halving is a pre-coded rule built into the software protocol with the simple objective to gradually reduce the supply issuance. Bitcoin first experienced the halving phenomenon in 2013 where the reward value for successful block mining reduced from 50 bitcoin to 25 bitcoin and
Bitcoin last halved on May 11, 2020, around 3 pm EST, resulting in a block reward of 6.25 BTC.
Bitcoin halving event triggers after every 210,000 blocks being mined, which happens to be roughly after four years. The miners’ reward for processing transactions is cut in half, with this halving cycle. It is imperative to know that this halving also cuts the rate at which a new bitcoin is released into market circulation. This event can continue to exist till the year 2140, so what will happen to miners’ rewards? Will they mine any further bitcoin? No, by rule this will cease to exist, but there will be a fee that will be paid to the miners for processing transactions that will be paid by network users
History Of halving Event Till Date?
- The first bitcoin halving occurred on November 28, 2012, after a total of 5,250,000 BTC had been mined.
- The next occurred on July 9, 2016
- The latest event occurred on May 11, 2020.
- The upcoming event is slated to occur in the Spring of 2024.
What Is the Significance Of Bitcoin Halving for Investors?
This event is of prime significance as this also leads to a supply shock and makes Bitcoin scarce and valuable to hold.
At the time of writing, As of June 2021,
- Max supply of Bitcoin is limited to 21 million
- Out of this, almost 18,734,693.00 has been mined and is under circulation
- So almost 2 million+ is what only remains to be mined as a reward.
So if you are a long-term investor, this event is a positive sign for you.
- This supply shock can lead to higher demand and push the price higher. But the real advantage only lies in the game of going long.
- With Bitcoin becoming a store of value, one can easily use it as collateral to raise fiat money, even this can be used to borrow another crypto by making use of Decentralized finance platforms.
- Most importantly, this can be a real tool to hedge against rising inflation, which is the making of our failing fiat economy
Though many investor & miners are well informed about the value associated with this halving event, the evidence from the market also proves this hypothesis, with every halving, the market does react with positive sentiment thought that reaction has not been so significant, but psychologically it does instill confidence among all who are hardcore bitcoin fan (I am one of them for sure).
Even though radically no logical cause-and-effect relationship exists between halving and prices, the narrative it sets does increase the market participation, which also impacts the price in a positive manner. But empirical evidence does show that bitcoin price tends to rise in anticipation of a halvening, often several months prior to the actual event.
Opinions expressed here at CryptoWise are not investment advice and are only for educational purposes. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency, or digital assets. Please be advised that your transfers and trades are at your own risk, and any losses you may incur are your responsibility.