Bitcoin is the first ever decentralized blockchain in the world. Most people take Bitcoin for a simple online transaction program. However, Bitcoin was designed as an alternative to the centralized fiat currency system.
Therefore, it contains several economic control features to ensure that it is a viable solution to replace the government-issued paperback as a medium of exchange. In this article, the reader will learn about such an important protocol named Bitcoin Halving and why it is necessary.
What is Bitcoin Halving?
For the people who are uninitiated with the concept of Bitcoin and blockchain, it is important to establish what it is first. Bitcoin is software that can perform as a digital payment platform without needing any centralized or private supervisor.
In simple words, it is automated and it does not depend on a single server to keep the accurate and verified transaction records of its users. All transactions on Bitcoin are recorded and secure using cryptographic technology.
Bitcoin was created by a pseudonymous creator or group called Satoshi Nakamoto. Nakamoto also published a Bitcoin Whitepaper to provide important information and explain its technical composition to its stakeholders. Bitcoin Whitepaper has made it clear that the ultimate goal of its eponymous cryptocurrency is to become a medium of exchange.
Furthermore, Bitcoin Whitepaper established Bitcoin as an alternative to the fiat currency system. Bitcoin Halving is one of the automated protocols added to the Bitcoin blockchain to control its total supply.
How does Bitcoin Halving Work?
To understand Bitcoin Halving it is important for the masses to learn about Bitcoin mining. It has been mentioned already that Bitcoin is a decentralized financial network. It means that Bitcoin does not have any centralized checker or private validator that ensures that all financial records on the blockchain are authentic.
To enable automated transaction verification, Bitcoin uses a mining model that is known as Proof of Work or PoW. This mining model allows miners to set up computation units or machines to compete with each other to solve the Bitcoin cryptographic puzzle.
It is important to note that every time a Bitcoin user makes a transaction on the network, it is protected by a cryptographic code. The job of the miners is to solve that code by creating a unique hexadecimal key through computation power.
Because Bitcoin uses the PoW consensus model, all the Bitcoin miners compete with each other to solve the puzzle first. The first miner to generate the correct hexadecimal digits or hash gets to add the new block of transactions to the genesis chain.
In return, these miners earn the Bitcoins that have been committed by the Bitcoin transaction makers as transaction fees. Additionally, miners also earn newly minted Bitcoins that are released by the blockchain automatically to incentive them.
In this manner, Bitcoin miners are the ones who are collecting or minting new Bitcoin tokens until all 21 million Bitcoins have been mined. Bitcoin Halving is an automatic protocol in the Bitcoin blockchain that cuts down the amount of Bitcoin rewarded to the miners after every 4 years.
This protocol has been added to control the total supply of Bitcoin and ensure that it retains high demand among investors and works as an inflationary cryptocurrency.
Significance of Bitcoin Halving
At first glance, it can seem that Bitcoin Halving can keep reducing the rewards for miners of the network. However, in reality, Bitcoin Halving has increased the total earnings of the miners for the same amount of work done concerning time.
For the benefit of the investors it is important to note that Bitcoin supply is controlled and thus it retains high demand among the investors. Bitcoin’s total supply has been capped at 21 million coins. It means that there are going to be only 21 million Bitcoins in the whole world and that cannot change.
However, at present all Bitcoins are not mined. As users are making more transactions on the network, miners are prompted to verify these transactions and earn new Bitcoins. It means that new Bitcoins supply is added to the market by the way of miners earning new Bitcoins by mining.
Therefore, miners can add new Bitcoins to the marketplace and increase their supply. On the other hand, miners can also hoard new Bitcoins and limit their supply so that their prices keep increasing.
Bitcoin Halving works on one of the simplest and most effective economic tenets called demand and supply. When the supply of a given asset increases in the main markets it means that its demand is going to reduce and thus its prices will also lower.
On the other side of the spectrum, when the asset becomes scarce in the marketplace, it means that its prices are going to increase and demand will also rise. Bitcoin Halving has been introduced to ensuring that the total supply of Bitcoin remains small in the Bitcoin marketplace.
In this manner, Bitcoin supply can remain limited over time and ensure that it retains a steady demand which in turn complements its prices.
How does Bitcoin Halving Impact Price?
It has been established that Bitcoin Halving depends on the demand and supply dynamics to ensure that Bitcoin prices remain high over time. However, there are more than one ways that Bitcoin’s Halving impacts its prices. One of the major impacts of Bitcoin Halving happens by a visible rise in the hash rate of the Bitcoin blockchain.
Hash rate is the amount of computing power that is required to mine new Bitcoin blocks or verify transactions. Whenever the date of Bitcoin Halving draws closer the hash rate automatically increases as proven by historical data.
Whenever the Bitcoin Hash rate increases it means that the blockchain becomes more secure. It also means that the chances of a 51% attack become negligible. 51% attack is a hypothetical scenario where hackers can take hold of the Bitcoin network and double spend the Bitcoins by manipulating the transaction records.
However, a higher hash rate means that there are more Bitcoins miners and therefore there are lesser chances of hackers taking over more than 50% of the hash generation of Bitcoin. The increase in the Hash rate is also good for Bitcoin prices.
However, it can increase the mining difficulty which means that miners require more computation power to validate Bitcoin transactions than before.
When mining difficulty increases the cost incurred for mining operations also increases for the miners. To this end, the miners who are unable to keep up with the competition end up shutting down their mining farms. These events have been corroborated by the data collected during the last two Bitcoin Halving events.
In the aftermath the miners who went out of commission were restored within a year by the way of purchasing more advanced mining equipment. In this manner, the total supply of new Bitcoins decreases more than the effect of Bitcoin Halving.
While the miners are trying to upgrade their mining equipment to match the new mining difficulty, they hold on to their existing Bitcoin reserves. These miners sell their Bitcoins during the next ATH or price peak throughout the year and induce the cumulative effect.
Historically, Bitcoin’s new price peak happen one year after the Bitcoin Halving event as per the data collected during the Bitcoin Bull Run of 2013 and 2017. Experts have found a strong correlation between long-term Bitcoin price appreciation and Bitcoin Halving.
However, other factors can impact the outcome. Nevertheless, Bitcoin’s Halving has almost always led to price appreciation in the short term.
What do Crypto Experts Say about Bitcoin Halving?
Bitcoin is a complex and intricate financial network. Therefore, it is not easy to determine how its impacts Bitcoin prices and how to measure its impact.
For this purpose, it is best to take a look at the opinion and reviews of financial and cryptocurrency experts on the matter of Bitcoin Halving. Some of the most important insights about Bitcoin Halving from key financial figures have been given as under:
Lennard Neo is a Bitcoin researcher who shared his views on Bitcoin Halving with Forbes magazine. He claimed that Bitcoin Halving’s arrival signals an immediate short-term pullback. He also claimed that during Bitcoin’s Halving most traders were seen to take profits and dissolve their positions.
He predicted that Bitcoin’s long-term prices are likely to appreciate post-halving during 2020 and 2021. Neo claimed that Bitcoin prices will also improve under the pretext of economic turmoil.
Bybit CEO, Ben Zhou is also bullish on Bitcoin due to Bitcoin Halving. He stated that the global economic cascading is bound to make an impact on Bitcoin prices. He further added that economic forces will always remain a strong driver of Bitcoin’s momentum.
Zhou revealed that he is bullish on Bitcoin prices on account of the Bitcoin Halving as well as positive movement for the broader cryptocurrency market.
JST Capital co-founder Scott Freeman has also shared his take on the matter of Bitcoin Halving. However, he opines that Bitcoin Halving may not have such as the strong impact on the positive price movement of Bitcoin contrary to popular beliefs.
He believes that Bitcoin’s Halving is going to change the profitability of Bitcoin miners. However, he claims that Bitcoin miners have already made suitable adjustments to their business models.
Hal Finney, one of the top Computer scientists in the world and an expert cryptographer claimed that mining for Bitcoin should not become too profitable. He added that Bitcoin prices therefore should not go overboard in comparison to the cost of mining while taking into account the cost of mining equipment depreciation. It is believed that he was alluding to the value and impact of the Bitcoin Halving protocol.
What do Crypto Stakeholders Think About Bitcoin Halving?
It is important to note that Bitcoin is a decentralized project which means that it is owned by its stakeholders. It is not wrong to say that Bitcoin prices are dictated by the impression of the Bitcoin project among its stakeholders. Some of the major Bitcoin investors have shared their remarks about the Bitcoin Halving events as under:
Paul Tudor Jones is a renowned hedge fund manager who has claimed that Bitcoin makes up for 1-2% of his total cryptocurrency portfolio. He also referred to Bitcoin as a great speculation and has revealed his bullish stance on Bitcoin on account of Bitcoin Halving.
He quoted that every day that Bitcoin remains intact; the trust of the investors is going to keep increasing in the network.
The data projections indicate that whenever the Bitcoin Halving date is approaching the price traction and engagement of Bitcoin increases. In general, cryptocurrency investors are bullish and positive about Bitcoin Halving and the market tends to indicate a visible increase in the trading volume and new Bitcoin accounts.
At the same time, before every Bitcoin Halving event there is a significant acceleration in Bitcoin accumulation with a view of approaching price appreciation.
What do Miners Think About Bitcoin Halving?
It has been mentioned before that Bitcoin Halving directly impacts the miners on the Bitcoin blockchain. It has been said that Bitcoin Halving is bad for the miners and good for the rest of the stakeholders. However, there are two aspects when it comes to the Bitcoin miners’ impression of Bitcoin Halving.
Speaking from a negative perspective, Miners can suffer from short-term losses or obstacles on account of Bitcoin Halving due to an increase in the mining difficulty. When they require more computation power, they have to shut down their operations and invest more money for upgrading their mining equipment.
At the same time, when miners close their shops it means that the hash rate starts to dwindle and it can expose the Bitcoin network to security threats. On account of the impressive price appreciation of Bitcoin, trading fees only make up for a small fraction of the mining revenue.
On average miners can earn up to 900 Bitcoin per day by minting and 60-100 Bitcoins through the gas. However, Zhou believes that in the future gas will increase while minting rewards will decline. It means that the overall revenue for the miners is going to remain intact.
Furthermore, since demand keeps increasing on account of Bitcoin Halving, it means that miners may make better profits on account of the spot prices of Bitcoin despite the smaller amount of Bitcoin mining rewards.
There are some suggestions that Bitcoin can turn to a PoS consensus mechanism just like the Ethereum blockchain to conserve energy. Bitcoin Suisse founder Niklas Nikolajsen told the media that PoS is a proven consensus model and he is sure that Bitcoin will switch to it in the future.
However, there is a dedicated group of Bitcoin purists who identify as Bitcoin maximalists and campaign for keeping Bitcoin unique and immutable. It means that most Bitcoin stakeholders are unlikely to vote in favor of any proposals that introduce a hard fork to switch Bitcoin to the PoS model.
Bitcoin maximalists believe that Bitcoin is not like any other cryptocurrency and it is a standalone currency that should persist in its original form.
Deflationary and Inflationary Cryptocurrencies
It has been mentioned before that Bitcoin Halving makes its native currency deflationary and that Bitcoin was introduced as a replacement for the fiat currency system. Many people believe that the fiat currency system is flawed on account of its constant and continuous value depreciation.
Fiat currency has replaced the gold standard that required governments to issue currency equal to the total amount of gold in their national reserves. Fiat currencies are issued at the discretion of a government without requiring any backup such as gold.
Since fiat currency value keeps decreasing on account of factors like inflation and money supply it is an inflationary currency. Bitcoin, on the other hand, intends to be a better alternative to the fiat currency system.
Therefore, the Bitcoin blockchain has introduced several financial management protocols like Bitcoin Halving. These mechanisms ensure that the total supply of Bitcoin decreases over time which ensures that the intrinsic value of Bitcoin keeps increasing.
Furthermore, the total supply of Bitcoin is capped at 21 million which ensures that its supply does not keep increasing. On account of all these supply control mechanisms, Bitcoin’s value keeps increasing over time making it a deflationary currency.
Advantages of Bitcoin Halving
Bitcoin Halving ensures that the total supply of Bitcoin does not go overboard in the market. Bitcoin Halving maintains the long and short-term demand for the flagship cryptocurrency. Bitcoin’s Halving makes it a deflationary currency which means that its prices and value are going to increase with time.
Bitcoin Halving makes its native coin a better alternative for fiat currencies by the way of fixing the issue of inflationary currency. Bitcoin Halving increases its impression for investors by controlling price and maintaining demand as a long-term investment.
Bitcoin Halving incentivizes miners and other stakeholders by ensuring price appreciation in the future. Bitcoin Halving can result in increased trading volume, traction, community interaction, and online searches according to the data projections shared by Google Trends.
Limitations of Bitcoin Halving
Bitcoin miners can get smaller rewards for the same work they are doing on account of Halving.
Bitcoin miners will need to upgrade their equipment to match the mining difficulty and increase their operational costs.
Bitcoin halving can result in miners taking a break to upgrade their mining capacity and decrease the hash rate resulting in increased exposure to a 51% attack.
Bitcoin Halving is one of the most discussed and important protocols of the Bitcoin blockchain. There are total of 64 Bitcoin Halving events starting from 2009. Thus far Bitcoin Halvings happened in 2009, 2012, 2016, and 2020 starting from 50 Bitcoins mint reward reduced to 6.25 BTC at present.
The next Bitcoin Halving is set to take place in 2024 and it could prepare Bitcoin and the broader cryptocurrency market for a new Bull Run.