What is Bitcoin Halving and How Is It Done?

The Bitcoin halving event is expected to happen this weekend, most likely either late Friday or early Saturday. This important event usually occurs once every four years, but the exact date can vary. Keep an eye out for it!

Bitcoin, the standalone cryptocurrency, continues to be the one major factor attracting more and more investors, technologists, and the general population. One of the major events is “Bitcoin Halving,” which influences its supply and demand. In this blog, you will learn about “Bitcoin Halving,” its general overview, and the various implications and historical perspectives concerning Bitcoin.

Bitcoin Halving: An Overview

Source: Crypto.com

Bitcoin halving is a pre-planned action which is scheduled to happen approximately after every 210,000 blocks that have been mined. It is worth mentioning that this happens at regular intervals of approximately every 4 years. In this process, instead of adding new Bitcoins to circulation at the current pace, the newly mined currency is decreased at the network’s rate by 50%. This is done through a mechanism known as algorithmic deflation, which is a part of the guidelines of the Bitcoin protocol. 

Also Read: How Digital Currency Reshaping the Future Economy of Gig Market like Freelancing

Rationale Behind Bitcoin Halving

The notion of Bitcoin’s halving, closely linked with its cryptocurrency mechanics, is a product of Satoshi Nakamoto’s innovative design. This esteemed monetary framework, with its finite supply, serves as a barrier against inflation and facilitates appreciation, in contrast to the scarcity challenges encountered by gold. Over time, Bitcoin’s block rewards are halved, resulting in a gradual decrease in issuance rates.

Implications of Bitcoin Halving:

Inflation Control:

Bitcoin halving is a process to stabilize the Bitcoin network and maintain inflation by slowing down new Bitcoins coming into circulation. Through limited reward reduction and supply scarcity, Bitcoin aims to neuter inflation pressure.

Effect on Fiat Currency Conversion:

Halving the algorithm of Bitcoin to avoid inflation only inside the cryptocurrency realm does not result in being beneficial for investors’ inflationary effects regarding fiat money. Through this process, cryptocurrency users lose the inflation protection benefits that are available with traditional fiat currencies. This is because they need to convert their crypto to fiat to access the larger economy.

Demand Dynamics:

The halving event usually causes demand to rise for new Bitcoins since the supply of existing Bitcoins is cut in half. Historical precedence shows that after the halving, the price rises and there is a higher demand for it.

Investment Perspective:

Bitcoin’s change from a means of payment to an investment tool is underlined by the opportunity that it may lead to robust gains. The investors consider halving as a chance for them to enhance their investments, hence increasing speculation behaviour in cryptocurrency values.

Mining Industry Impact:

Bitcoin mining, a vital part of the cryptocurrency system, relies largely on the phenomenon of Bitcoin halving. While big-scale mining companies can plan and stay prepared to cope with halving events by increasing their production capacity, smaller miners could face challenges such as lowered rewards and fierce competition.

The falling mining rewards may cause difficulties in mining operations profitability, especially for the small-scale players who lack the financial power to remain competent in the sector.

Also Read: What is a crypto trading bot and how does it work?

Consumer Considerations:

Consumers and retail Bitcoin users may be negatively affected by the changes in the market value of their Bitcoins as a result of the halving process. The ones sending transactions or remittances in bitcoins may be affected by price volatility in the cryptocurrency market.

Historical Perspective:

Source: Coindesk.com

Bitcoin underwent halving events, which can be used as a hypothesis as to how the market will respond to alterations in the production plan of the decentralized cryptocurrency.

2012 Halving:

• The first halving in 2012 provided the first opportunity to analyze how the markets react to sudden reductions in miners’ payouts. Before this event, the community was ready for the repercussions of the hard fork on the Bitcoin network. Interestingly, the price of Bitcoin increased after the halving, providing further evidence of the positive market reaction.

2016 Halving:

• The second halving in 2016 was a milestone event for the Bitcoin space, as experts, users, and even investors predicted the possible future of the digital asset. During the day of the halving, the price plummeted by 10% to 610 bucks and was quick to bounce back and recover.

• Within the year following the event, the market was ready to respond to the halving by witnessing a notable rise in Bitcoin’s price. At the same time, there was a reduced supply of Bitcoin which was probably the cause of the steep price spike. With a constant drop in supply and demand, Bitcoin’s price increased as a result.

• Looking at the bitcoin price 365 days after the 2nd halving, bulls gained a massive 284% to $2,506, which is an approximate 2.5 times increase.

2020 Halving:

• The last bitcoin halving in 2020 coincided with the currency’s protracted rise, which is the main argument in favor of the theory. Contrary to the original views, the market showed its inclination towards the rally after the event, which resulted in Bitcoin’s price rise.

• One year after the 2020 halving, Bitcoin has climbed more than 559% showing that even after the event, market sentiment and investor confidence still play an important role in the rise of Bitcoin.

Also Read: What is AI Crypto and How will it Lead to the Finance Future?

How will Bitcoin Halving impact the market?

Experts believe that the upcoming Bitcoin halving could drive up its price because it will become rarer, potentially attracting more investors to the market.

Historically, Bitcoin often sees a price increase about 60 days before a halving event, as seen in both 2016 and 2020, when it reached new highs.

However, around 14 to 28 days before the halving, the price usually drops a bit. This happened in 2020 with a 19% drop and was even more significant in 2016, with prices dropping by up to 40%.

“After the halving, Bitcoin typically enters a phase of sideways movement, which can be termed as reaccumulation. This phase generally occurs at levels around old all-time highs, preparing the market for the next impulsive wave of price increases. Historical data shows that after the reaccumulation phase post-halving, Bitcoin tends to experience a parabolic rise in price. This pattern is evident in the discussions of post-2020 halving events, where a significant upward movement followed the halving and reaccumulation phases. The general consensus is that prices should go up because of the supply shock, but geopolitical events such as the threat could cause the market to plunge as it did over last weekend.”

Said, Rajagopal Menon, VP, WazirX

Conclusion

Bitcoin halving is an essential milestone of the crypto’s pace; having a double-decided decentralized mining economy. The notion that Bitcoin is a digital gold is further reinforced through the reduction of the new coin production rate following regular halving, ultimately making Bitcoin scarce. The spotlight on the cryptocurrency world is often very bright and Bitcoin events, including halving remain in focus for the investors, traders, and endless enthusiasts trying to map the future course of the cryptocurrency industry.