What is bitcoin halving? | How it works and why it’s important

What is Bitcoin halving? Learn about its mechanics, meaning and investment implications in this comprehensive guide.

If you’re thinking about investing in crypto, you’ll want to know about Bitcoin halving. It is one of the most important events in the world of cryptocurrency, often surrounded by anticipation and speculation.

Analysts believe that this event can greatly affect the value of the cryptocurrency, so it is important to understand it.

What is Bitcoin Halving?

So what exactly is Bitcoin halving? Simply put, it is the process of halving the reward given to miners who verify the legitimacy of transactions before they are added to a permanent record, or block, on the Bitcoin (BTC) network.

These miners solve complex problems to earn the right to add new transactions to the blockchain, and they are rewarded with new Bitcoins for their efforts.

Currently, miners receive 6.25 Bitcoins for each transaction they verify. Before the last halving in May 2020, they got 12.5 BTC for the same task. After the next halving, they will receive 3,125 BTC.

Another question: How often does Bitcoin halve? The halving occurs approximately every four years, or after 210,000 blocks have been mined.

The process is a kind of scheduled economic policy written into Bitcoin’s code to protect it from inflation, preserve its value and ensure its long-term viability.

But when will the next Bitcoin halving happen? At the moment, no one knows the exact date of the next halving; this is expected to take place around mid-April. However, predictions are expected to become more accurate as we approach block #840,000, where the event is coded to occur.

How does Bitcoin halving work?

We have already mentioned the core function of the halving process, which is block reward reduction. However, you should know that the discount rate is predetermined and written into Bitcoin’s code. This is a flat 50% decrease, meaning that the reward is halved with each event.

The process is also automatic and does not require any prompt or manual intervention. The Bitcoin network protocol adjusts itself when a programmed block height is reached.

This will continue until all 21 million Bitcoins have been mined, a milestone expected around 2140. After that, miners will no longer receive new Bitcoins as a reward, but will instead earn from transaction fees.

Bitcoin halving history

Halving occurs approximately every four years, with the first occurring on November 28, 2012. There have been two other BTC halvings: the second which took place on July 9, 2016, and the third which took place on May 11, 2020.

Before the first halving, Bitcoin block rewards stood at a princely 50 BTC. After the event, miners started getting 25 BTC, with the coin’s dollar price rising from $13 to over $1,000 in the following year.

The same happened after the 2016 halving. Before the event, BTC was selling for around $664, but soon after, between 2017 and 2018, the price shot up to as high as $20,000.

Around May 2020, just before the last halving, you could buy Bitcoin for around $9,700. However, once block rewards fell to 6.25 BTC, the coin led the rest of the crypto market on a merry run that ended at the end of 2021, with Bitcoin trading at a peak of around $69,000.

When we look closely at the history of Bitcoin halvings, we find that these events often signal significant changes in the cryptocurrency’s market value. This pattern indicates that when the number of new coins entering the market is cut in half due to halving, and the demand remains the same or increases, the price of Bitcoin typically increases significantly.

However, not only do these affect the price of BTC, which attracts investor interest, but they also challenge miners by reducing their earnings for the computing power spent, potentially spurring advances in mining technologies and strategies to maintain profitability amid rising operating costs.

Expectations for 2024 halving

As we get closer to the April 2024 event, excitement is growing among experts and analysts in the crypto space. At crypto.news, BitsGap CEO Max Kalmykov shared his thoughts. He sees the halving as a major event that could push Bitcoin’s value due to its scarcity.

Kalmykov notices a pattern in these cycles, but also points out that each one is different. Bitcoin takes more time to reach new highs after each halving. He predicts a stabilization in Bitcoin’s price between $50,000 and $60,000 by year-end after a post-halving adjustment.

Analyzing historical trends around halvings, crypto price prediction website CoinCodex also notes that the patterns mentioned by Kalmykov are emerging, suggesting a possible increase in Bitcoin’s value ahead of the event.

In the opinion of the site’s analysts, while Bitcoin’s price trajectory following these events does not follow a simple pattern, they have noted an overall upward trend during each halving cycle. According to them, observations of the three previous halvings indicate a consistent rise in the cryptocurrency’s price one month before the event.

On the other hand, post-halving outcomes varied, with the price rising significantly after two halvings and falling after one. However, the analysts argue that Bitcoin has consistently hit new all-time highs within the four-year intervals between halvings, underscoring its strong long-term performance when looking at a broader timeline.

Of course, such sentiments have not been without detractors, with certain schools of thought believing that Bitcoin prices could potentially crash after the halving. For example, JP Morgan analysts claim that BTC prices could drop as low as $42k. According to them, the halving event could negatively affect the profitability of BTC mining, leading to higher production costs and ultimately lower prices for the coin.

Others also argue that the halving’s impact on BTC prices may be overstated, highlighting factors such as institutional acceptance, increasing demand, and the fact that the Bitcoin market is now more mature, backed by a higher market cap.

Why is Bitcoin halving important?

The impact of Bitcoin halving is significant across the cryptocurrency ecosystem, causing a ripple effect among miners, investors and businesses.

For miners, the halving means a decrease in earnings, which could result in only the most efficient and well-equipped miners remaining competitive. This process of natural selection not only slows down the rate at which new Bitcoins are created, but also strengthens the network by ensuring that the most dedicated participants own mining power.

Businesses involved in the Bitcoin economy, either by working in it or accepting it as payment, may also face the challenge of adapting to the post-halving landscape.

They may recalibrate pricing models in anticipation of market volatility, explore financial instruments such as Bitcoin derivatives, or reconsider consumer spending trends within the crypto market to mitigate potential impacts to their operations.

Investors, on the other hand, are likely to experience a mix of volatility, speculation and anticipation. As discussed earlier, historically, the aftermath of a halving has seen Bitcoin’s value surge, a performance attributed to a tightening supply with a growing or sustained demand.

This pattern of price movement after halving has become a point of interest for those trying to predict Bitcoin’s future value, leading many to wonder about the reasons behind the price rise after a halving.

Investor Strategies

To protect themselves from the Bitcoin halving effect on prices, experts recommend several strategies for investors. First, focusing on long-term investments in Bitcoin can be beneficial, as its value is expected to increase over time.

Another strategy is to use dollar cost averaging (DCA). It involves investing a fixed amount in BTC at regular intervals, regardless of the current price. That way, they can average out the cost per Bitcoin over time and reduce the impact of any halving-induced volatility.

Additionally, diversifying their investments by including other digital currencies in their portfolio can help investors spread their risk and reduce their dependence on Bitcoin’s market performance.

Staying well informed by following news and developments about Bitcoin and the broader cryptocurrency market is crucial to the successful implementation of these strategies. Remember that investing in crypto is highly volatile. Don’t risk money you’re not ready to lose.

Future implications of next Bitcoin halving

With the halving, Bitcoin is expected to cement its reputation as “digital gold.” This is because the reduced flow of new Bitcoins will likely make it even more valuable and seen as a reliable investment to hold.

This change means that there may be fewer Bitcoins available for trading, which could make supply even tighter.

Experts believe that this event will affect not only Bitcoin, but the entire cryptocurrency market. They expect this to lead to a lot of speculative trading as investors seek profit in what could be a more unpredictable market.

Smaller cryptocurrencies, known as altcoins, can also experience large changes in their value. This is because the cryptocurrency community can shift their investments to find the next big hit.

As the creation of new BTC slows, some think that other digital currencies may become more prominent, either competing with or supporting Bitcoin. This can change their value and how they are used online.

Closure

In summary, the upcoming halving event in April 2024 marks an important opportunity for the cryptocurrency world, shedding light on the intrinsic value and scarcity of Bitcoin.

This event highlights Bitcoin’s distinctive economic approach, comparing it to “digital gold” and preparing for what could be another exciting phase in its extraordinary story.

The halving affects everyone from miners to investors, bringing both challenges and opportunities. It encourages a fresh look at strategies to make the most of its effects.

Despite various predictions and high expectations, one thing is clear: the halving highlights Bitcoin’s increasing importance and its crucial role in the future of global finance.

As both the cryptocurrency community and wider financial analysts await the halving, there is general agreement that its impact will extend beyond Bitcoin’s price, affecting the entire digital currency landscape.