What is Bitcoin Halving?

Bitcoin halving or ‘halvening’ is a term related to mining new bitcoins. A bitcoin halving is an event where the reward for mining new blocks is halved, it means miners receive 50% fewer bitcoins for verifying transactions. It was scheduled by pseudonymous figure Satoshi Nakamoto itself, who first brought the concept of Bitcoin in the world.

Bitcoin halvings are scheduled to occur once every 210,000 blocks are added to the bitcoin blockchain – roughly every four years – until the maximum supply of 21 million bitcoins has been generated by the network.

What is the purpose of halving?

While the creator has not explicitly explained the reasons behind halvings, many have speculated that the system was designed to distribute coins more quickly at the beginning to incentivize people to join the network and mine new blocks. Block rewards were programmed to halve at regular intervals because the value of each coin rewarded was deemed likely to increase as the network expanded.

It is in fact done to support Bitcoin’s property of being a deflationary currency. Unlike other fiat currencies, bitcoin’s value or buying power increases over time. Bitcoin halvings are important events for traders because they reduce the number of new bitcoins being generated by the network. This limits the supply of new coins, so prices could rise if demand remains strong. While this has happened in the months before and after previous halvings – causing bitcoin’s price to appreciate rapidly – the circumstances surrounding each halving are different and demand for bitcoin can fluctuate wildly.

What are its effects?

Bitcoin halving takes place for several reasons:

To control the creation of new coins so that its value can be kept high. The bitcoin blockchain system is created in such a way that only 21 Million Bitcoins will be in existence when they all are mined which is expected to be till year 2140.

Its direct effect can be observed on miners, because right after halving takes place the block rewards gets halved (50%) than before which means miners gets half rewards. Because the halving drops the amount of BTC that is mined as Bitcoin approaches its fixed supply of 21 million, miners will earn less BTC after the halving for performing the same work.

If the Bitcoin price does not increase substantially after the halving, and if the difficulty of mining remains put, miners will see a higher break-even price with similar revenues as before.

Because the halving drops the amount of BTC that is mined as Bitcoin approaches its fixed supply of 21 million, miners will earn less BTC after the halving for performing the same work. If the Bitcoin price does not increase substantially after the halving, and if the difficulty of mining remains put, miners will see a higher break-even price with similar revenues as before.

For that reason, it would make sense for big mining centers to accumulate large amounts of capital before the halving to finance their operations in advance in case the price of Bitcoin does not increase right away after the halving.

Impact of Bitcoin Halving on its value and Miners

Impact of Bitcoin halving on its price or market value can’t be determined as it is not a proven strategy. However, it can be assumed on the basis of some perceptions, predictions, previous results and market behaviors. Since the bitcoin came in existence in 2009, there have two events of halving occurred in the past in the year 2012 and in 2016.

Both had some similar impacts on the price of a bitcoin right after the event but as expected the price of a bitcoin didn’t skyrocketed as much. But the prices got a rise within a year after halving in both past cases.

For a better explanation let’s take a look over the previous two halvings in detail, what was a bitcoin worth before and after halving took place.

The first halving occurred on 28 November 2012 when the bitcoin block reward dropped from 50 to 25 new bitcoins. Prices increased from $11 a month before the halving to $12 on the day of the event itself, continuing to rise over the course of the next year to reach $1038 on 28 November 2013.

The second halving took place on 9 July 2016. An event which saw the block reward fall from 25 new bitcoin per block to 12.5 bitcoin. Bitcoin’s price surged from $576 on 9 June 2016 (a month before the halving) to $650 at the time of the event itself. Despite significant volatility, prices continued to rise over the course of the next year to reach $2526 on 9 July 2017.

From above two observations it can be said that it had some effect on the price of the bitcoin, not suddenly but during the time thus making it more valuable for miners even if the block rewards gets halved. In this way the number of bitcoins can be regulated in the system and a smaller number of bitcoins must be mined by miners after each halving yet the demand will be the same and this will increase its price.

The bitcoin went through its third halving on 11 May 2020. The bitcoin price has remained flat since the supply squeeze—up a little over 1% and hovering around $8,800 per bitcoin and we can see now it is around $11,700 per bitcoin in two months of halving. So, it is very clear that it is going to increase more in the future as more and more people are going to use it and more nodes connecting into the Bitcoin Blockchain.

The next halving is expected to happen in 2024 but there are many other factors and assumptions impacting its price until it is officially accepted by institutions.

A theory has emerged that miners tend to sell before the halving to accumulate enough Bitcoin to finance their operations for many months after the halving occurs, allowing them to hold onto the majority of Bitcoin they mine.

Theoretically, such a practice would be beneficial for miners because the break-even price of Bitcoin mining spikes significantly when a block-reward halving occurs.

The bitcoin price before and after halving also depends on predictions, perceptions, market behaviour, buying habits, awareness about the event and its effects. Here I will elaborate this fact with the help of two scenarios.

In a scenario the bitcoin price can see a very high rise even before halving in a case that people think the BTC price will go high after halving thus start buying coins. This can all of a sudden create a huge demand and make its value sky high before happening the event.

In another scenario there maybe such a perception among people that halving is going to reduce all the values of bitcoins after it. In this case people will start selling their coins to prevent the risk of loosing their wealth. This will lead in rapid downfall in the value of bitcoin. In this scenario the demand of the bitcoin will face downfall and after the event the block reward will also be halved. It means there will be less bitcoins coming into the system as form of block rewards.

As a result, when the block rewards are less, their values get down as well as their demand will. In this scenario it will be not profitable for miners mine new blocks and this can gradually lead towards the downfall of the system. However, this can’t happen so easily as there are thousands of computers are connected to the system empowering the security, value and trust in this system and this can only happen if a huge proportion of that systems agree to take it down which will result losing their efforts and its result too.

These are some facts and assumptions related to Bitcoin halving and its impact on the miners, price of the currency and related terms. The actual results may differ based on some factors as mentioned.