L.As with the Olympic Games, the Bitcoin network initiates a special event called “Halving” every four years, which millions of Bitcoin investors follow intensively. And halving is a big deal for a reason.
Namely that Bitcoin price rose hundreds of percent a few months after each of its halving days. Of course, it is important for any Bitcoin investor to understand the halving and how it affects the value of Bitcoin.
First a little background on the subject of “mining”
Every transaction made with bitcoins is stored in a ledger called a “blockchain”. This blockchain (or ledger) is similar to a decentralized bank ledger that tracks balances and transactions.
To ensure that the blockchain stays up to date and accurate, the Bitcoin network hires miners to verify these transactions. How? The answer is simple. Miners use computer equipment to solve complex equations in a process called mining.
In this process, miners essentially play the role of virtual bank tellers: they check checks, make sure all signatures and account numbers are correct, match the customer name with an official ID, and verify that the user has enough cash to make money the transaction. Instead of verifications, however, miners check the codes within the blockchain network.
When these equations are solved, miners will have verified transactions on the blockchain and the transactions will be cleared to be iterated through. For all of these problems, Bitcoin will pay the miners by releasing 6.25 Bitcoin from its reserves of untapped supply.
The unusual feature of halving
Here is an unusual property of bitcoin. Bitcoin halving should take place every 210,000 blocks – roughly every four years – until the Bitcoin network has released the maximum supply of 21 million Bitcoins. On Halving Day, the number of Bitcoin rewards granted to Bitcoin miners for processing transactions will be reduced by 50%.
A typical example: For four years from 2016 to 2020, 12.50 bitcoins were released every 10 minutes per block. After the recent “halving” in 2020, only 6.25 Bitcoins will be released per block.
As a result, these halves instantly lower the rate of production of Bitcoin. Why? Once again, Bitcoin released 12.50 bitcoins every 10 minutes for four years. Then suddenly every 10 minutes after the “halving day” only 6.25 Bitcoins are released. And can you imagine what could happen to the price of Bitcoin? Imagine if the world’s annual gold production suddenly halved, how would that affect the price of gold? The price will certainly skyrocket because the supply has just become scarcer.
That, of course, is the economy of supply and demand.
Of course, these Bitcoin halving have correlated with massive Bitcoin price increases:
- The first halving, which occurred in November 2012, brought Bitcoin from around $ 12 to nearly $ 1,150 in a year.
- The second halving occurred in July 2016. The price for this halving was around $ 650, and the price of Bitcoin rose to nearly $ 20,000 over the next 17 months.
- The third and most recent halving took place in May 2020. It quickly became a trigger for the latest increase to almost USD 50,000 – as the following chart from Portfolio Insider shows:
Why does the halving happen?
By now you’re probably wondering, “Why does it halve every four years?”
Edan Yago, co-founder of the Bitcoin-based financial protocol Sovryn, stated, “Satoshi Nakamoto (the pseudonymous creator of Bitcoin) believed that the need for mining subsidies would decrease as the transaction fees generated by the network increased over time – and against this background the specified, decreasing rate of newly minted BTC was built. “
In other words, after Bitcoin releases its entire $ 21 million offering, the miners will earn much of their revenue from the transaction fees paid by users. This is similar to a Mastercard, which earns 2.5% for every transaction made on its card.
The last of the 21 million Bitcoins is to be published around the year 2140. At this point, the halving plan will be discontinued as the supply of new bitcoins has been completely exhausted. However, this is in more than 100 years. Until then, practically every Bitcoin investor will have to watch out for any halving due to its enormous impact on the Bitcoin price.
The next halving is expected in 2024.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.