What is Halving Bitcoin?
The last halving of Bitcoin took place on May 11, 2020, and the next one is expected to take place in May 2024. To explain what Bitcoin Haling is, we first need to explain a little about how Bitcoin the network works.
The technology behind Bitcoin, block chain, basically consists of a collection of computers or nodes that use Bitcoin software and contain a partial or complete history of events on its network. Each node or node with the entire Bitcoin transaction history is responsible for approving or rejecting the transaction on the Bitcoin network. To do this, the node performs a series of checks to ensure that the transaction is valid. These include ensuring that the transaction contains the correct confirmation parameters, such as sanctionsand does not exceed the required length.
The transaction will only take place after all parties operating in the Bitcoin network have accepted the block in which the transaction is located. After approval, the transaction is appended to an existing block chain and sent to other nodes. The block chain acts as a pseudonym as a record of events, i.e., its contents are visible to everyone, but it is difficult to identify the parties performing transactions online. This is because the block chain assigns encrypted addresses to each party on the network that operates. Nevertheless, even those who do not participate in the network as nodes or miners can view these events live by looking at block explorers.
More computers or nodes that are added to the block chain increase its stability and security. Currently, more than 10,000 nodes are estimated to use Bitcoin code.1 While anyone can participate in the Bitcoin network as a node, as long as they have enough storage space to load the entire block chain and its event history, not everyone is miners
Bitcoin mining is a process in which people use their computers to participate in Bitcoin’s blockchain network as an event processor and validator. Bitcoin uses a system called Proof of work (PoW). This means that miners must show that they have sought to deal with transactions that pay commissions. This work involves the time and energy it takes to operate the computer hardware and solve complex equations.2A
Faster computers with certain types of devices produce more block rewards and some companies have designed computer chips specially built for mining. These computers are responsible for handling Bitcoin transactions and are rewarded for doing so.
The term mining is not used in the literal sense, but is used to refer to the method of collecting precious metals. Bitcoin miners solve mathematical problems and confirm the legality of the trade. They then add these events to the block and create chains from these event blocks to form a block chain. When a block is filled with transactions, the trades that take place within the block are processed and confirmed by the miners and rewarded with Bitcoin.
Larger monetary transactions require more reinforcements to ensure security. This process is called mining because the work done to remove the new Bitcoin from the code is the digital equivalent of the physical work done to pull gold from the ground. More information on the technical internal operations of Bitcoin mining can be found here Bitcoin mining article.
After each 210,000 blocks mined, or approximately every four years, the block premium paid to Bitcoin miners is halved. This will reduce the issuance of the new Bitcoin by half. This is Bitcoin’s way of using a synthetic form of inflation that halves every four years until all of Bitcoin is released and in circulation.
This system will continue until about 2140. Until then, miners will be paid fees for handling transactions paid by network users. These fees ensure that miners continue to have incentives to mine and maintain the network. The idea is that competition for these charges will keep them low once the splits are completed.
The halving is significant because it represents a new drop in Bitcoin’s limited limited supply. Bitcoin has a maximum offering of 21 million. At the time of writing, there are already 18361438 bitcoins in circulation, so there are only 2,638,562 remaining mining commissions.
In 2009, the prize for each block in the chain was 50 bitcoins. After the first halving, it was 25, then 12.5, and became 6.25 bitcoins per block on May 11, 2020.3 When you imagine this in another context, whether gold mined from the earth is cut in half every four years. If the value of gold is based on its scarcity, “halving” gold production every four years would theoretically raise its price higher.
Halving the impact
These reductions reduce the rate at which new coins are created and thus reduce the quantity available. This may have some consequences for investors, as other low-supply assets, such as gold, may have high demand and rising prices.
In the past, these Bitcoin values have correlated with massive increases in Bitcoin prices. The first halving, which occurred in November 2012, rose from about $ 12 to nearly $ 1,150 within a year. The second halving of Bitcoin occurred in July 2016. The price of this halving was approximately $ 650 and by December 17, 2017, the price of Bitcoin had risen to nearly $ 20,000. Then the price dropped from this peak to about $ 3,200 during the year, which was almost 400% higher than its halving.4A
The halving theory and the chain reaction it initiates works like this:
The reward is halved → half of inflation → lower available supply → higher demand → higher price → the incentive for miners remains, despite lower rewards as the value of Bitcoin increases during the process.
In the event that halving does not increase demand and price, there would be no incentive for miners because the reward for performing transactions would be lower and the value of Bitcoin would not be high enough. To prevent this, Bitcoin has a process to change the difficulty it needs to get mining commissions, or in other words, the difficulty of mining the event. In the event that the premium is halved and the value of Bitcoin has not increased, the difficulty of mining would be reduced in order to provide an incentive for miners. This means that the amount of Bitcoin released as a reward is still lower, but the difficulty of handling the transaction is reduced.
This process has proven successful twice. So far, the result of these reductions has been a rise in prices followed by a sharp fall. However, the collapses that followed these gains have continued to keep prices higher than before these halved events. For example, as mentioned above, the bubble for 2017-2018 saw Bitcoin rise to about $ 20,000, only falling to about $ 3,200.4This is a huge drop, but the price of Bitcoin before halving was about $ 650. While this system has worked so far, the halving is typically surrounded by huge speculation, hype and volatility, and it is unpredictable how the market will react to these events in the future.