What Is the Bitcoin Halving And How Does It Affect The Bitcoin Price
November 2012 and July 2016 are when some historic events happened in the world of cryptocurrency. They changed the value of Bitcoin forever. This occurrence is known as the ‘HALVING’ of Bitcoin. What does ‘halving’ mean? Why did it happen? When will it happen again?
What is the Bitcoin halving?
The halving of Bitcoin is a pretty simple concept, but to understand it you need to know the fundamentals of Bitcoin mining. Let’s get right into it. Bitcoin mining is a process that involves a lot of time and equipment that’s aimed at guessing a random number that solves an equation generated by the blockchain system. This process is extremely challenging as it has to be performed by supercomputers which are very expensive and need lots of electricity to function properly. The bright side for people that are willing to mine is the fact that there are rewards for successfully mining a block. These rewards have to do with two important rules set up by Satoshi Nakamoto, Bitcoin founder. The first rule is that the supply of Bitcoin is finite and limited to 21 million, and the second is that for every block solved the reward decreases by 50% every 210,000 blocks.
This decrease is set in place because of the law of supply and demand. If the coins are created too quickly, or there’s no end to the number of Bitcoins that can be created, eventually there will be so many Bitcoins in circulation and they would have very little value.
After extensive research, it is known that a block is mined every 10 minutes, 6 blocks every hour, 12 blocks every two hours, and so on. When BTC first appeared, the reward for a block was 50 Bitcoins. This means that every 10 minutes a miner somewhere was getting 50 Bitcoins delivered into their wallets. The reward for solving a block as you’re reading this is 12.5 Bitcoin. The decrease from 50 to 12.5 happened gradually because of a feature programmed into BTC. It is a predetermined process that cuts the block reward in half every 210,000 blocks [Approx. 4 years] and it will continue until the last Bitcoin is mined in the year 2140 [after roughly 21 million Bitcoins have been mined].
After November 2012 and July 2016, the next 210,000 blocks have almost been mined. This means the next halving is taking place this year – on May 7. Many Bitcoin experts are working hard on their preparations for the effects the halving will have on the price of Bitcoin. Because, as shown in the past, this event can have long-term effects on the price of BTC.
What will be the effect on the price of Bitcoin?
There are multiple theories from different experts on how the price of BTC will be affected. The most popular one is a simple concept I mentioned earlier – i.e the law of demand and supply. If fewer Bitcoins are generated, the newly increased scarcity automatically makes them more valuable. But this doesn’t happen right away.
Another set of experts claim that the halving event is well known to the community and therefore will not surprise anyone or change the price of BTC, while another set claims that due to shortage in “Bitcoin supply” the price is bound to climb as demand will increase.
We believe that the miners have a major role in the outcome of halving, so while trying to understand more on why halvings have a direct relation to price changes, the role of miners can not be overlooked.
Based on our calculations, 4,380 blocks are mined each month and added to the Bitcoin blockchain. As you read this, the block reward is 12.5 BTC with a price of around $8,000, which I’ll use for this example. Crunching the numbers shows that 4,380 x 12.5 x 5,000 = $273,750,000 per month.
This is approximately how much in dollars miners are earning each month in total revenue. Note, these are all the miners across the planet, which are thousands.
After the next halving, only half as many BTC will be generated per day. (4,380 x 6.25 x 5,000 = $136,875,000 per month). When this occurs, one of the two things will happen: miners will simply give up, or they will refuse to sell Bitcoins generated at a price below $10,000. Past halvings have given us a clue on what to expect from the next halving – and it was a mix of both. Some of the miners will give up and a larger number will decide to keep mining.
What To Expect From The Upcoming Halving
After collecting data on Bitcoin prices, we found out that large volatility events seem to occur around 12-18 months after each halving. The first time, BTC went from around $11 to around $1,100 and back down to $220. The second time, BTC went from around $230 to around $20,000 and back down to around $4,000.
So what about the next halving? All we can say is that history has a tendency of repeating itself.
It’s important to note that with each halving, there were different variables at work. With the first, it was the first time a halving ever happened, and no one had any real idea what to expect. The second time, the rise of Ethereum and initial coin offerings was a new factor that wasn’t in play in 2012.
The biggest changes in the crypto world this time will be the increased public awareness about Bitcoin and the interest of institutional investors. If financial institutions start investing bigger parts of their portfolio (read: billions), it could affect Bitcoin the ways investors have never seen before. We never give financial advice, but there is one thing you should be aware of: after Bitcoin halves, it will become more scarce, which usually affects the price in a positive way.
To learn more about BTC halving 2020 and Bitcoin price prediction, check out this page.