Bitcoin Halving; know all about it

Fredrick Awino

By now, most people know one or two things about virtual currencies, popularly known as cryptocurrencies. On top of the list of cryptocurrencies is bitcoin which draws its popularity from being the first crypto offering to enter the market in 2009. Actually, bitcoin to most people is synonymous with cryptocurrency. Early and veteran investors in bitcoin have had mixed experiences with the currency ranging from great fortunes to heart-breaking losses and anything in between. 

WARNING: Investing in crypto, or other markets, can be of a high risk for your savings. Do not invest money you cannot afford to lose, because there is a risk for losing all of your money when investing in crypto, stocks, CFDs or other investments options. For example 77% of retail CFD accounts lose money.

From the time that bitcoin started becoming popular as an investment and trading option, so many people have ventured in it. With a promise of being a great investment option and futuristic currency, so many have bought bitcoins. If you really wish to get a feel of just how many people are into bitcoin investment then the recent temple in bitcoin value can be something worth reading. So many became nervous and hysterical when every news about bitcoin pointed towards a negative trend. 

The mixed news of bitcoin success and failures notwithstanding, so many people still do not mind trying it out. As is expected, every investment faces slumps and surges at different times and bitcoin is no exception. A realistic crypto investor could be reasonably deterred in buying crypto during the slump in anticipation that its value will soon stabilize if not rise to its former glory or even more. Amidst all these shenanigans comes the question of just how much bitcoins are available in circulation. Put differently, what is the maximum set amount of bitcoins to be mined? to get a clue for this question, you can get a leading explanation at becoming 21 million bitcoins (BTC) rich, really?

Bitcoin halving, the limit to how much bitcoin can be in circulation 

Although Bitcoin is a digital money, it is impossible to create it endlessly. This means that a demonstrable scarcity forms an important element in its value proposition. There are two major concepts relating to Bitcoin scarcity that you must understand if you are a cryptocurrency investor. The first one is that there will only ever be 21 million bitcoins. Secondly, the amount of bitcoin added to a network will be reduced by a half after every 4 years. The second concept brings us to our topic of discussion, and is known as bitcoin halving.

So what exactly is Bitcoin Halving? In simple terms, it refers to the rate at which new units of bitcoins that enter circulation are reduced by half after every four years. Ideally, this process is a part of the overall strategy used by bitcoin creators to regulate their supply.

What’s so special about Bitcoin Halving?

The halving mechanism is vital because it makes bitcoin scarce, thereby rendering it resistant to inflation. Remember, Satoshi Nakamoto created the first million bitcoins in 2009. Since then, investors have mined about 90% of the total number. 

This means that only about 1.95 millions more will ever be created. Although the identity of Satoshi remains a mystery to give the actual highlights about its nature, many people believe that the bitcoin platform is highly deflationary. Thus, the purchasing power of the currency can increase with time especially when the demand goes high.

The issuing of a smaller number of bitcoin over a time through halving helps retain its value with a consistent demand. In fact, this is the exact opposite of what happens to fiat currencies, which are highly influenced by the prevailing market inflationary factors. By writing a total supply and halving into the Bitcoin code, the value of Bitcoin is generally established firmly and practically impossible to change.

How bitcoin Halving Works

It is good to have knowledge about the concept of halving. To understand how it works, I will give an illustration on some basic facts about how cryptocurrency was created. Remember, Bitcoin was launched in 2009 as an alternative to fiat currency and by way of a decentralized system. Here, miners utilize high-powered computer systems to solve several cryptographic puzzles with an aim of verifying and validating the transactions on the blockchains. They are rewarded in return for the new bitcoins they have created.

The process of bitcoin mining is essentially a competition between miners, who race to be the first to add new blocks into the blockchain and be rewarded. However, the mysterious Nakamoto set and programmed the reward to be reduced by half after every four years. Therefore, such rewards are reduced by half for every 210,000 blocks added. The first halving event took place in 2012 while the most recent one in May 2020. Reasonably, the next one is expected to take place in 2024.

Effects of Bitcoin halving on the Bitcoin’s Network

Understandably, halving events come with its major impacts on various parties involved within the bitcoin network. The two major stakeholders within the crypto space are the investors and miners. Let’s take a brief look on how bitcoin halving affects these stakeholders.

Effects on bitcoin Miners

If you are a miner, be sure that halving will have enormous impacts on you. These effects are mainly two-sided. On one side, the falling bitcoin supply plays a huge role in increasing the demand and price. However, fewer mining rewards may render your survival within the ecosystem a difficult one. Because the mining capacity of bitcoin is reasonably counter-cyclical to its price, the number of miners are likely to reduce in an event the prices rise.  

Effects on Investors

As an investor, you are likely to benefit in an event that halving occurs.  Halving will mainly make the cryptocurrency prices rise based on the reduced supply and the rising demand. When investors trade within the crypto blockchain, their activities can encourage the participation of other investors. The rate at which the prices increase differ depending on the logistics and factors attached to each price halving.  

Financial Takeaway about bitcoin halving and its implications

Bitcoin halving is a highly publicized event that any crypto nerd or passionate investor can’t miss to know. The process of bitcoin halving happens after every 4 years.  The halving mechanism is vital because it makes bitcoin scarce, thereby becoming resistant to inflation. Thus, the programming helps a particular cryptocurrency to keep the maximum supply of bitcoins at a fixed level. As an investor, it is advisable to know about the bitcoin halving as they can cause huge price variabilities. 

Author Fredrick Awino