The concept of decentralization is fairly new, and the adoption rates are pretty handsome across the board as the world has opened its arms for cryptocurrencies, for so many states, financial enterprises, and institutional investors are interested in these. There are, although some countries out there that are not a fan of decentralization and consider cryptocurrencies the end of the financial system and monetary concept of the present as we know it.
Despite that cryptocurrencies are continually growing and reaching new horizons, Bitcoin being the flagship cryptocurrency, is the lead in the crypto market, and that can be proved via the popularity and market capitalization that it enjoys.
Concept of Blockchain Explained
Every cryptocurrency has its own blockchain on which the information regarding the onset of financial transactions taking place is recorded in real-time; you can also call it the blockchain, a Ledger technology that has all the data there is regarding transactions taking place for a dedicated cryptocurrency. Miners continue to solve complex mathematical equations to find dedicated blocks on a blockchain by using their computational prowess, and when a block has been found, they get rewarded for their efforts for partaking in the mining.
Bitcoin Halving: A Brief Introduction
The mining rewards for Bitcoin are not consistent as one might think because, in the beginning, there were very few miners, and the problems or mathematical equations that are to be solved to find a dedicated block on the blockchain of Bitcoin were not as hard as these are today. As the intensity and volume of miners continued to increase, so did the complexity of the problems and provision of rewards in terms of its volume.
This specific process is known as Bitcoin halving, and it is one of the most elementary events that take place on the Bitcoin blockchain. Bitcoin halving introduces deflation into the price of Bitcoin by reducing the number of tokens that are already in circulation and therefore increasing the demand for Bitcoin.
Some say that it is a necessary evil but is not without its implications for stakeholders and miners operating within the Bitcoin ecosystem. So what happens in Bitcoin halving is that the reward for Bitcoin mining is cut in half. To be able to understand Bitcoin halving in detail you must first consider pacing yourself with what the Bitcoin network and mining is.
What is Bitcoin Network?
The entire network of Bitcoin is currently being run and validated by a collection of computers or nodes. These are in charge of running the Bitcoin software, and these contain either the complete or partial history of all the BTC transactions that have taken place to date. Therefore the node containing the complete history of transactions that have taken place on Bitcoin is primarily responsible for either approving or rejecting a dedicated transaction taking place on the Bitcoin network.
To be able to do that, the specific node performs a series of checks to validate a transaction; some of these ensure that the origin of the transaction is valid and that it contains the permitted number of nonces that are not above the required length. Each and every transaction is approved individually, and when all the transactions of a dedicated block are validated, the block is registered onto the BTC blockchain.
After the transaction has been added to a dedicated block, its information gets broadcasted to all the other nodes in real-time. As the number of computers for nodes is being added continually into the Bitcoin blockchain, stability and security continue to improve. At the moment, there are about 14,616 nodes out there that are running the entire code of Bitcoin.
Anyone can take part in this endeavor and thus become a Bitcoin node, but there are some specific criteria that they need to meet. First of all, they must have a solid system that is able to store the entire history of Bitcoin transactions, and it should be efficient to bear the load that will be diverted towards it; not all of these validators are miners.
What is Bitcoin Mining?
Bitcoin mining is a protocol that is ultimately necessary to ensure that all the transactions taking place on bitcoin’s blockchain are properly propagated and interpreted for the sake of validating them. Bitcoin miners take part in the processing and validation of the transactions by using a specific algorithm in the place known as ‘proof of work.’
The very definition of this algorithm is that every miner should be able to prove that they have invested both their time and processing power for validating the transactions so they could be rewarded at the end.
These complex equations are extremely eccentric, which means that a large enough machine having enough throttle in it, such as a high-end CPU and multiple GPUs linked together, would have a better chance at solving the mathematical problems and thus unraveling the next block on bitcoin’s blockchain. Once a transaction has been validated, it is added to the block, and there are multiple blocks on Bitcoin’s blockchain stretched as a fine group of beads on a string.
All the miners that take part in the processing and validation of these transactions are awarded Bitcoin at the end when a dedicated block has finished being recorded on Bitcoin’s blockchain. The transactions done with Bitcoin are highly secure and efficient because of the reason that these are validated and confirmed via many nodes, and miners ensure that these are secured through and through.
Bitcoin Halving
There is a set parameter for when the Bitcoin halving is supposed to take place, after the mining of 210K blocks on the Bitcoin’s blockchain, or when four years have passed, Bitcoin halving commences. It means that the reward for Bitcoin miners for taking part in the processing of transactions is also cut in half. The very word ‘halving’ here means cutting the rewards in half.
Interestingly enough, it also cuts down the rate at which new bitcoins are produced, which means that for the next four years, there will be fewer Bitcoin tokens out there in supply than there were four years before. This is the network’s way of implementing price inflation until the moment when all Bitcoin tokens would be released.
All of this has already been programmed into the code of the Bitcoin network, and to share a significant detail with you, it is estimated that the mining of the Bitcoin would continue until the year 2140 until all 21 million BTC tokens have been released. When that happens, miners won’t be able to get their rewards in terms of Bitcoin, but they will be paid in transaction fees that the users will be paying for making certain transactions on Bitcoin’s blockchain, another purpose of these fees would be to keep the miners incentivized, so they continue to mine and add value to the Bitcoin network.
The overall amount of the token was designed to be finite from the get-go; this was a part of an earlier arrangement to fight inflation and the conventional modes of business conducted on the centralized grounds. In the conventional sense of the way, whenever there is inflation, the state would just continue to print more money, thus adding fuel to this already bulging inflation; the same can’t take place for Bitcoin because it is designed this way where there can’t be any more tokens minted when the ultimate number reaches 21 million Bitcoin tokens.
When this number has reached, there will be no more Bitcoin tokens, and miners would then spend their time and energy towards maintaining the network rather than minting new Bitcoin tokens. At the time of writing, 18.85 million Bitcoin tokens have already been minted and are in circulation, which just leaves behind 2.15 million Bitcoin tokens that are yet to be minted via mining awards. In the early days of 2009, when Bitcoin was first minted, the very reward for mining a single block on its blockchain was 50 bitcoins.
After that, first having taken place and the reward got split into 25 and after that 12.5 and now it is 6.5 Bitcoins per block after the recent halving of May 11, 2020. In theory, Bitcoin halving is supposed to drive the price of Bitcoin higher because there are only so many tokens out there. That is why when demand for something goes higher and its supply is limited, the price usually takes a boost which is exactly how Bitcoin was designed from the get-go.
Implications of Bitcoin Halving
If you are going to see this whole thing from a decentralized point of view, then you will come to the conclusion that Bitcoin halving is not a choice but a necessity. What it does is reduce the speed at which new tokens are minted and therefore consistently lower the supply of Bitcoin tokens and keep it right to the optimized count that was decided long ago when Bitcoin first started trading. In this regard, Bitcoin is just like gold having a limited supply and therefore being high in demand which can result in massive performance on Bitcoin’s part in the upcoming future and a sudden boost to its price and value.
Only when you get around this extreme phenomenon and how it used to transpire in the past do you come to know the significance of Bitcoin halving and why it was important to be included in the first place. At the very first Bitcoin halving, which happened in November 2012, the price of Bitcoin boosted from $12 all the way to $1217 in November 2013. The second Bitcoin halving took place in July 2016, and the price of Bitcoin at that time period was $647, but after a whole year, its price jumped all the way to $19,800.
Approaching the next halving period that took place in May 2020, the price of BTC was exactly at $8787, but after a whole year, it jumped to an all-time high of $64K in May 2020, and approaching May 2021, its price plummeted all the way to $54K. So if you can manage to comprehend the whole thing, then you would see that there is definitely a pattern for how the price of Bitcoin sees a huge bump whenever a halving period approaches, and after a whole year, the price of BTC is revised to a higher degree.
This brings us to a rather old scenario, what if after the halving of Bitcoin, the price of the token doesn’t increase, miners then would have no incentive to mine because the rewards for completing the processing of transactions would be only negligible. In order to prevent this, Bitcoin has a dedicated system in place.
Suppose if halving doesn’t increase the price or demand for Bitcoin, then to incentivize miners and keep them intact at their jobs, the complexity of the transaction would be considerably reduced. This way, miners could still be able to complete multiple validations on bitcoin’s blockchain and get their rewards in a consistent manner. Their rewards will be smaller, but at the same time, the transactions would be much easier to process and interpret.
From an analyst’s point of view, having periods are extremely constructive as these present a dedicated boost in the price and performance of Bitcoin, and these have been successful twice already. After a halving period, the price of Bitcoin just skyrockets. But to stay clear, obvious, and correct information, prices are met with market corrections and crashes afterward. Sometimes these are severe and pack quite a blow, but other times these are pretty bearable, and Bitcoin recovers itself pretty decently.
To stress a little on the success of Bitcoin halving, it should be mentioned here that the third having for the flagship cryptocurrency took place in a global pandemic where conventional businesses and financial markets were suffering and were being pounded with inflation, but Bitcoin and crypto market managed to survive and do exceptionally well. This is the very reason why institutional investors and people who see value in things and they want their investment to be properly subjected have now turned to the crypto market and especially Bitcoin, because they consider it a hedge against inflation.
How does Bitcoin Halving Affect the Investors and Miners Individually?
Bitcoin halving is not without its repercussions, and since it is pretty significant, even the repercussions that this have are also pretty intense. It does leave a lasting effect on multiple parties that are tied with Bitcoin’s network, but the investors and miners really take the heaviest hit. Following is a little description of how it transpires and what happens in specific detailing;
Halving is primarily a phenomenon that is better versed for the investors than it is for miners because whenever halving takes place, it is the price and value of Bitcoin that is increasing, and that is good news for investors in every way imaginable. But for miners, it also means diminishing rewards which is the very incentive for miners to be in this game in the first place. When the rewards are getting slim, the individual miners will find it extremely hard to continue with the operation of mining because they would literally be putting in more than what they are earning or recovering. That is a win for large mining organizations.
When the price of Bitcoin increases, the number of miners that are involved in the mining operation significantly decreases, and in that way, it is not a solid endeavor for miners. Halving is associated with a price increase and a sudden boost in terms of value for Bitcoin, but at the same time, it may also leave the network of Bitcoin vulnerable to attacks because as miners leave it, the network’s security diminishes, and it becomes more vulnerable.
As explained earlier, the halving event has plainly cheering effects for the investors because the price, as well as the value of Bitcoin, is going to increase, which means that the investment of the investors is also going to see a huge bump. When a halving event comes nearer, the trading activity certainly increases on the network that is also true in terms of market corrections catching up with Bitcoin as it does see a significant boost in the number of people trying to make a trade, but in a halving event, the sentiment of the investors and traders is positive across the board.
Final Words
Bitcoin halving is scheduled to cease itself around the year 2140 or so, according to many crypto analysts, because this is the year when the last Bitcoin would have been minted, completing the supply of 21 million Bitcoin tokens that would be already sent out there and be in circulation. But even when this happens, the miners would still be receiving a competent fee for taking part in the maintenance of the network, which would work as an incentive to keep the miners on board.
This transactional fee that will be awarded to the miners for their services is also expected to increase with time as more people will be coming in to explore Bitcoin and making transactions on the blockchain, thus keeping things pretty active.