Meaning of Bitcoin Halving
What is Bitcoin Halving? In short, bitcoin halving is the process of cutting the block in half. When the speed of the development of the block is cut in half, due to which miners will end up earning half amount of the respective market price.
With that said, let’s understand Bitcoin Halving a bit deeper. Currently, we are having a collective supply of 21 million bitcoins. It sounds massive. Isn’t it? Upon reaching the 21 million bitcoins, the development of new coins will stop.
Bitcoin halving provides a backing that the amount of bitcoin that can be mined with each block decreases, making bitcoin more demanding, and ultimately, more precious.
If we see this process practically, the incentive for mining bitcoin decreases on completion of each bitcoin halving. Although halving is associated with a huge increase in the price of bitcoin, which provides miners with the incentive to mine more, their rewards are now halved.
The first bitcoin halving happened in 2015 which slashed miners’ incentives from 50 BTC to 25 BTC. Presently, block reward is near around 6.25 BTC (due to the halving that took place on May 11, 2020).
How different Bitcoin is from fiat currencies?
Although Bitcoin and fiat currencies have some similarities: both can be used to make payments, in both these currencies, consumer trust plays an important role. Here, we will tell you the differences that these two currencies possess.
While trust in fiat currencies is ensured through the supply of money issued by a central authority like the Reserve Bank of India. On the other hand, the trust in cryptocurrencies is ensured on its foundational underlying technology – blockchain technology.
For an instance, if you buy something with Fiat currency, you need to rely on an official authority as RBI or ECB (European Central Bank) or any governmental body to serve as an intermediary that guarantees the currency’s worth. In any of these ways, the holder understands that the value of these currencies will not diminish after one transaction.
Effect of Bitcoin Halving on the price of Bitcoin
Bitcoin Halving is a process of dividing the block rewards in half. Do you know the amount of block reward before the first Halving? It was 50 BTC. After the first Bitcoin Halving in 2012, the 50 BTC reward was come down to 25 BTC per block. Again, in 2016 (Second Bitcoin Halving), the reward was cut down from 25 BTC to 12.5 BTC per block. Finally, in 2020 (the most recent Bitcoin Halving), this 12.5 BTC block reward was further reduced to 6.25 BTC.
So, the question here is that what impact does this Bitcoin Halving process create on the price of Bitcoin?
Contradicting to various theories that say the price will go up because of Halving, but the most common impact would rather depend on the supply and demand. How?
In the simplest language, if block reward is reduced due to Bitcoin Halving then less bitcoin will be deployed into the circulation. When there will be less Bitcoin in circulation, it will lead to less supply.
But if everyone wants to buy bitcoin, the demand will overpower the supply. In this case, the price will go up due to excessive demand and less supply. The simple economic logic here is that higher demand and less supply lead to an increase in market value.
Future of Bitcoin Halving
As we have already discussed in the previous heading the first-ever Bitcoin Halving took place on 28th November 2012. By the time it started, we have seen the average Bitcoin Halving speed is within every 4 years. If we calculate through this average, the last Bitcoin Halving happened in 2020. The next Bitcoin Halving could happen at the end of 2024.
Although it is not more than an assumption. Experts are also saying that the Bitcoin FMV (Fair Market Price) can hit $100K in 2021.
Conclusion
The Bitcoin Halving process is an important activity for cryptocurrencies. It is significant because it marks another drop in the rate of development of newer Bitcoins: right now the supply of Bitcoin is approximately 21 million.
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Key Takeaways from this chapter
- Presently, block reward is near around 6.25 BTC (due to the halving that took place on May 11, 2020).
- Bitcoin Halving is a process of dividing the block rewards in half.
- The last Bitcoin Halving happened in 2020. The next Bitcoin Halving could happen at the end of 2024.
- Bitcoin halving marks another drop in the rate of development of newer Bitcoins.
- Experts are also saying that the Bitcoin FMV (Fair Market Price) can hit $100K in 2021.
Frequently Asked Questions
Why do we see Halving in less than 4 years?
The Bitcoin mining algorithm is set to find new blocks once every ten minutes. However, if more miners approach the network with greater hashing power, the time to find new blocks decreases.
This is re-established by resetting the mining difficulty once every 2 weeks or so to set up the 10 minutes algorithm back. In the last few years, the average time to find a newer block remains roughly 9.5 minutes (10 minutes).
What happens when there will be no bitcoin left in blocks?
There are 21 million bitcoins to be mined till 2040. After that, the Bitcoin Halving will be closed because there would be no more new coins to mine.
Miners will be incentivized to continue validating and confirming new transactions on the blockchain network because the total valuation of transaction fees paid to miners is expected to grow into the future.
