What is meant by Bitcoin halving?
Every four years, the amount of bitcoin awarded to miners is cut by half, until all 21 million bitcoin have been virtually mined (probably around the year 2140). The halving mechanism contributes to the rarity of bitcoin and its resistance to inflation.
As with any other kind of currency, Bitcoin is limited in its supply. Its value proposition is based on the fact that it has a verifiable scarcity. The Bitcoin system is based on two fundamental concepts: scarcity and value. For starters, there are only 21 million bitcoins in existence. (By the end of 2020, there would be fewer than 2.5 million bitcoins left to be virtually “mined”). Second, every four years, the number of new bitcoins added to the network will be cut in half. The halving refers to this second concept.
When bitcoin “mining” began in 2020, 12.5 new bitcoins were added to the network every 10 minutes. This quantity was reduced in May, and is now 6.25. Once the 21 million coins have been mined, the price will decline to roughly 3.125 in 2024. (which estimates say should happen around the year 2140).
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What’s the big deal about the Bitcoin price halving?
The halving of the number of Bitcoins in circulation makes it more likely that the currency’s value will rise in the future (assuming consistent levels of demand). Fiat currencies, on the other hand, typically lose value over time due to inflation, which is why a Coke was just a dime in the 1960s. As one of the ways Bitcoin maintains scarcity, the halving is one of the reasons that millions of people are interested in the currency.
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What is the procedure?
As with the precious metal, Bitcoin is often compared to gold since both are valuable, scarce assets that are likely to withstand inflation. Contrary to popular belief, the exact scarcity of Bitcoin is known and can be verified by anybody, unlike with physical gold. Approximately three (Olympic-sized) swimming pools would hold all the gold ever mined, according to the United States Geological Survey, but no one can say for sure how much gold is still in the earth. In reality, new gold deposits are discovered every year, resulting in an ever-changing supply. There will only ever be 21 million Bitcoins, and there are currently less than 2.5 million left to mine as of late 2020. Bitcoin’s supply schedule is known.
Similar to mining gold, a network of computers around the world compete to verify bitcoin transactions.
Bitcoin is used to compensate the miners. Approximately 12.5 new bitcoins were distributed every 10 minutes in early 2020. There are now 6.25 new bitcoins created every 10 minutes instead of 10. The reward was cut in half in May.
The bitcoin mining reward, or “block reward,” will continue to be halved approximately every four years. Until all 21 million bitcoins have been mined by the year 2140, this will continue. A bitcoin miner’s income is derived entirely from network transaction fees, not from the sale of newly created bitcoins.)
There will never be more Bitcoin. This is in contrast to fiat currencies, in which the government or central bank can generate additional money at their discretion, potentially leading to inflation…
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Because the rate at which new coins are minted is being halved, the supply of new coins is also being reduced, even as demand grows. Other assets having a limited supply (like gold), which have a strong demand and push their prices up, have repercussions for investors.
These Bitcoin price halvings have historically been accompanied by sharp increases in the digital currency’s value. There was a rise from $12 to $1,217 on Nov. 28, 2013, which was the first halving. On July 9, 2016, the second Bitcoin halving occurred. The price of a bitcoin was $647 on the day of the price halving, and by December 17th, 2017, it had risen to $19,800. After a year, the price dropped to $3,276 on Dec. 17, 2018, a 506 percent increase over the pre-halving price. 4
On May 11, 2020, the most recent halving occurred. The price of a bitcoin was $8,787 on that date. An individual bitcoin reached $64,507 on April 14, 2021. (an astonishing 634 percent increase from its pre-halving price). May 11, 2021, a bitcoin’s price was $54,276, which is 517 percent higher than it was a month earlier, on May 11, 2021.
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Effects of halving
Miners would have little motivation to boost production if a halving did not increase demand and price. For example, the reward for completing a transaction would be smaller, and so the value of Bitcoin would not be sufficient.
The difficulty of mining a transaction can be changed to make this more difficult, as a precautionary measure in the Bitcoin protocol. The difficulty of mining would be lessened if the reward had been halved and the value of Bitcoin had not increased. While the payout for a transaction is still less, the difficulty of doing so has been reduced.
This method has worked twice before. As a result of these price cuts, prices have risen sharply before plummeting. However, despite the subsequent crashes, prices have remained higher than they were prior to these halving events.
For example, the value of a bitcoin rose to around $20,000 during the 2017 to 2018 bubble, only to fall to around $3,200. Before the halving, the price of a bitcoin was around $650.4. In spite of the fact that this method has been successful thus far, how the market will react in the future to events like the halving is difficult to foresee.
A global pandemic, heightened regulatory speculation, and greater institutional interest in digital assets all contributed to the third halving. In the wake of these extra influences, it is difficult to predict where Bitcoin’s price will end up.
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