Bitcoin is, without a doubt, a limited resource. Satoshi Nakamoto, the inventor of Bitcoin, correctly believed its scarcity would add value to the asset over time, as there will only ever be 21 million units of bitcoin mined.
In layman’s terms, this means preserving the digital asset’s value. More than 90% of the total supply of bitcoin has been created since it was first mined by Nakamoto in 2009, leaving only a little more than a million to be pumped into the system.
This rule is fixed and cannot be changed because it is already embedded in the binarian code.
Concept Of Bitcoin Halving
In 2012, the first bitcoin was halved. Since then, the bitcoin supply has been halved roughly every four years to keep the Bitcoin pool in check.
Remember the hard cap of 21 million? The process of mining bitcoin comes as a reward for miners preserving the Blockchain structure.
They do the work and are rewarded with some bitcoin. This process is based on a “proof of work” mechanism in which nodes (miners) in the bitcoin network complete complex mathematical equations and validates transactions in order to receive a reward in bitcoin units in addition to transaction fees.
When Bitcoin launched, the mining reward was 50 BTC but the first halving reduced this to 25 BTC which makes it a 50% decrease.
In 2016, the next halving drops the reward down to 12.5 BTC followed by 6.25 BTC four years later in 2020 to make it the third halving.
This goes on till all the bitcoin supply has been mined in the year 2140 to realize the “Bitcoin cap” completing a cycle of thirty-two (32) bitcoin halvings. But why is “the halving” so important?
Why Does It Matter?
Because of the Bitcoin halving event, which causes a decrease in miners’ payouts, an increasing number of miners are not incentivised to continue mining Bitcoin on the blockchain and may withdraw.
Is it any good?
In some ways, this is a good thing for Bitcoin holders because as the amount of Bitcoin decreases, the value rises. This is significant in order to maintain the course of its value cum scarcity. Furthermore, while mining incentives decline on a regular basis, it is expected that transaction fees will snowball to compensate miners. They currently only earn a fraction of the over 900 BTC they mint daily (via transaction fees).
When Bitcoin halving occurs around its expected times, one thing stands out in its aftermath: the post-halving price upswing(s).
This means a critical upside to this event is the surge in Bitcoin prices. In general, a dip in the supply of Bitcoin will ultimately increase its demand and price value — halving helps to achieve this effect. Despite that, the price of Bitcoin reduces shortly after its halving, this is not for long.
Soon enough, Bitcoin’s value rises on an upward slope as a result of its high demand. For example, during the second halving, the price of Bitcoin skyrocketed from a base value of $670 to $19,700 in December of that year.
The third halving also saw the price of Bitcoin surge from $9,000 to over $27,000 during the Covid-19 period. However, other factors contributed to such Bitcoin post-halving price spikes.
Conversely, the inflationary rate of Bitcoin decreases after each halving cycle. This is commensurate with the idea that Bitcoin is built to be a deflationary asset.
As such, each halving event causes a downward inflationary curve on the BTC chart. It fell from 12% in 2012 to about 5% in 2016 and is currently at a low rate of 1.77% inflation.
The next halving cycle will happen sometime in 2024 and the payouts for mining will expectantly be cut down. Miners may continue to drop out of the pursuit to mine Bitcoin.
However, it is observed that a reduction in rewards for miners should not necessarily intimidate miners out of the system because not long after the halving event, the value of Bitcoin continues to rise.
In any case, the halving of Bitcoin and its subsequent effect may cause traders to hold onto their assets rather than trade them in the hope of a substantial increase in its price in the future.
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