By Edul Patel
In the past few years, Bitcoin has experienced several cycles of price fluctuations, capturing the attention of investors and enthusiasts. Amidst these market movements, a crucial event known as Bitcoin Halving has taken place three times. But what exactly is Bitcoin Halving and what role does it play in the Bitcoin ecosystem?
What is Bitcoin Halving?
Bitcoin Halving is a special event that happens about every four years in the Bitcoin system. There will only ever be 21 million Bitcoins in total. Right now, around 19.5 million Bitcoins have been mined so far, of which 4 million has been irreversibly lost. 1.5 million BTC are yet to be mined. During the halving event, the rewards that Bitcoin miners get for their work are cut in half. This event has had an effect on the price of Bitcoin in the past. The next halving is scheduled to take place on 26th April 2024.
How does Bitcoin Halving Work?
In simple terms, Bitcoin validators are responsible for checking and approving Bitcoin transactions through a process called mining. When they successfully validate a block of transactions, they currently receive a reward of 6.25 BTC (Bitcoins), which is currently worth around $148,000. This acts as a good incentive for miners to continue validating and adding blocks of transactions to the Bitcoin blockchain.
These blocks of transactions are added approximately every 10 minutes, and the Bitcoin system has a rule that reduces the mining reward by half after every 210,000 blocks are created. This reduction happens roughly every four years and is often accompanied by increased price changes and unpredictability in the value of Bitcoin.
After the fourth halving event, which is scheduled to happen next year, the mining rewards will decrease to 3.125 BTC per block.
History of Bitcoin Halving and Price
Looking back at the past, we can see that during previous halving events, the price of Bitcoin increases in anticipation and then after the event it stabilizes. In 2012, the price was $9 on October 26th and rose to $12.35 on the day of the halving on 28th Nov 2012.
Similarly, in 2016 the price of Bitcoin was $568 on June 28th and on the date of halving on July 9th, the price was $650.53. In 2020, on April 11th the bitcoin price was about $5884 and on the date of halving on 2020 11th May, the price was $8553. These historical patterns show that Bitcoin Halving has often led to a substantial increase in price before and in the following months. This demonstrates the potential impact that the halving event can have on the value of Bitcoin.
Why is Bitcoin Halving Important?
The reason for reducing the mining reward through Bitcoin Halving is to manage the creation of new Bitcoins and maintain their limited availability in the long run. By lowering the reward, Bitcoin Halving helps control inflation and ensures that the production of new Bitcoins happens at a slower pace. This event has important effects on the supply and potential value of Bitcoin, as well as on the miners who play a vital role in securing the network using their computers. Understanding Bitcoin Halving is crucial for grasping how the Bitcoin market works and the factors that impact its value over time.
How can Bitcoin Halving Impact the Miners?
The upcoming Bitcoin halving event will reduce the mining rewards from 6.25 BTC to 3.125 BTC per block next year. This reduction in rewards may make mining less profitable for miners. Consequently, unless there is a significant increase in the price of Bitcoin, miners are likely to pause their investments in new mining hardware for the next few months. In some cases, miners may even shut down less efficient mining hardware because it fails to generate sufficient bitcoins to cover operational expenses.
In the short term, the decrease in mining resources is expected to result in a slower rate of Bitcoin creation. However, the Bitcoin network has an automatic mechanism to maintain a relatively constant rate of new bitcoin production. Every two weeks, the network adjusts the difficulty of the mining problem to ensure an average rate of approximately six blocks per hour. If blocks are being produced too slowly, the network lowers the difficulty level to widen the range of winning hash values. Conversely, if blocks are being created too quickly, the network increases the difficulty to make the mining problem more challenging and slow down block creation.
Miners strive to make profits, and competition among miners helps maintain relatively stable profit margins over time. Therefore, if revenues from Bitcoin mining decrease by half, miners will likely spend approximately half the amount to produce those bitcoins. Since electricity is a major cost in Bitcoin mining, the reduction in block rewards should ultimately lead to a similar reduction in the electricity consumed by mining.
Furthermore, the halving event indirectly affects mining difficulty. As block rewards decrease, miners may find mining less profitable and decide to stop or reduce their mining activities. This reduction in overall computing power dedicated to mining prompts the network to adjust the difficulty level downwards. The aim is to make it easier to find the solution and maintain the desired rate of block creation.
Conclusion
Indeed, it’s important to note that the impact of the halving event on mining profitability can be offset by higher prices of Bitcoin. When the price of Bitcoin increases, the revenues earned from each block also rise. This, in turn, increases the amount of money miners are willing to invest in mining hardware and the electricity they consume during the process. Therefore, if the price of Bitcoin rises significantly, miners are incentivized to purchase more mining equipment and expand their operations, leading to an increase in electricity usage.
The author is co-founder and CEO, Mudrex
