Bitcoin halving
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This article is written by Mahima Sharma, pursuing LLB from Symbiosis Law School, Pune. Through this article, the author has explained what bitcoin halving is and why it’s an essential part of giving the value to bitcoin.

Introduction

Bitcoin was conceived as a currency of deflation. Like gold, the idea is that bitcoin issuance should decline over time and therefore grow costlier. As bitcoins become scarcer and if demand for them rises with time, Bitcoin may be used as a buffer against inflation because the price is expected to grow, driven by market equilibrium.

Bitcoin halving is an event which occurs when the block reward to its miners are cut in half. This year bitcoin halving occurred on May 11, but before getting into how bitcoin affects it is important to understand how the bitcoin network works.

Bitcoin and its blockchain are merely a set of computers or clusters across the globe all of which have Bitcoin code installed on them. All of these machines have all of the bitcoin database installed on them. This assumes that the machine has a background of bitcoin code that guarantees that no one will trick the network because any machine can reject the transaction. Bitcoin is completely transparent in this sense, so no one can create a trade without someone watching it occur. Also, anyone who does not engage as a node or miner in the network can watch such transactions live by looking at block explorers.

More computer systems or nodes stored in the blockchain will boost its reliability and safety. There are presently over 10,000 nodes allowed to run the Bitcoin code. Whilst also anybody can take part in the bitcoin system as a node, as long when they have sufficient storage to install the complete blockchain and its history of transactions because not all are miners.

Bitcoin halvings are significant events for traders, as they lower the number of new bitcoins that the network is generating. That limits the supply of new coins, so if demand remains strong, prices could rise. While this happened in the months before and after previous halves – which caused a rapid appreciation of the price of bitcoin – the circumstances surrounding each halving are different and demand can fluctuate widely.

What is Bitcoin halving?

In the simplest form, the bitcoin halving occurs when the speed of the creation of the block is cut into half, due to which bitcoin miners will go from earning full amount to the half amount of the respective price running in the market during the event.

First bitcoin halving occurred in 2015 which slashed the reward from 50 BTC to 25 BTC.

For instance – if the current market price of bitcoin per block, abbreviated as BTC is 12.5 then when halving occurs the reward to the minors will be 6.25 BTC. 

What is a block?

A block is a file on the blockchain which stores 1mb of bitcoin transaction.

What is mining?

Bitcoin mining is the process where people use their computers to participate in Bitcoin’s blockchain network as a transaction processor.

When does halving occur?

There is no fixed date for the event of halving to occur but it largely depends when 2,10,000 blocks have been mined by the miners since the last mining which roughly takes four years. Having said that after the last halving in 2016 bitcoin halving occurred during May 11, 2020, to May 18, 2020.

The Bitcoin network sends out new bitcoins every 10 minutes. The creation of additional Bitcoins issued every 10 minutes was 50, for the first four years of Bitcoin’s existence. That number is cut in half every four years. The day the halves of amount are called a “halving” or “halvening.”

When the block reward is halved, a few people may measure that because of costs like electricity and hardware, their mining activity will no longer be profitable. Some people may stop trading completely if bitcoin’s price does not really rise to compensate, reducing the network’s amount of processing power.

It is believed that By 2140, all 21 million bitcoins (BTC) will be mined. However, by 2030, more than 98 per cent will be mined. On such last mining the maximum supply of 21 million bitcoins, users will no longer receive new block verification bitcoins. However, as an incentive to verify transactions, they will continue receiving trading fees-contributed by those generating payments.

Why does it matter?

Nakamoto who was the bitcoin creator has never explained why they choose this process for the creation of a new block of bitcoin but some speculate that the halving was designed to introduce more coins in the market in the very beginning of its creation and to attract miners and investors in the allure of incentive from all around the world, which basically means to create a hype.

But there were other aspects also: growing press reporting about cryptocurrency and Bitcoin itself, a certain curiosity with the transparency of the digital commodity, and a gradually but increasingly growing number of currency usage cases in the real world. Unless one places some money in the interest of history, then the bitcoin halving of past years can be treated as a long-term positive trigger for demand.

The halving reduces the number of new bitcoins per block generated. This means lower deliveries of new bitcoins. The lower supply with steady demand in regular markets typically contributes to higher prices. Since halving decreases the availability of fresh bitcoins, and demand typically remains steady, halving has usually preceded several of the biggest runs of Bitcoin. The halving is necessary. This is how Bitcoin controls its supply. Once the block subsidy expires, transaction fees will pay miners for securing the network.

Hence halving performs following functions-

  1. Limits the issue of coins, offering for a uniform issue. The lower the per block reward, the longer the coins are mined. This will decrease after halving the amount of mined bitcoins. 1800 are being mined daily nowadays and this number will be reduced to 900 BTC after May 2020. Halving slows down the production of new bitcoins and pushes the date the latter was created.
  2. Cryptoinflation restrains. The longer the coins are mined, the longer it takes for all bitcoins to get in circulation. Fresh coins are likely to grow rare over time. The more fresh coins are produced, inflation is lower.
  3. Contributes to the rising price for bitcoin (deflation). As the supply on the market is reduced, the demand and the rate are increasing.
  4. Retains the involvement of the miners because of its increase in commission fees and the impossibility of getting all the coins at once.

How does halving influence bitcoin’s price?

On the second day of the last halving which occurred in the year 2016, the price for bitcoin dropped by 10% leading it to $610, but then gradually it shot back up. The theory for this sudden shift in price is that when the halving occurs, it also cuts the inflation in the price of bitcoin which further leads to lower availability for the supply following which there is a rise in demand which ultimately results in an increased price for the reward.

During this whole process, miners’ reward stays the same even after the small reward because there is a gradual increase in the value of bitcoin.

Talking about those events when there is no gradual increase in the value and demand for bitcoin it will lead to no incentive to the miners and the value of bitcoin will not be high enough. To prevent this circumstance what the bitcoin system does is, it reduces the difficulty level to generate the transaction though it will not increase the value of bitcoin but will keep the miners incentivised. 

This theory has worked successfully in the last two halving events.

However, these are the factors which affect the bitcoin price-

  • Bitcoins supply

There might be a limited number of bitcoins – 21 million, all of which are projected to be mined by 2040 – yet even then, the distribution fluctuates based on the pace with which they reach the market and the behaviour of those that possess them.

  • The market cap for BTC

The size of the Bitcoin economy – and how expensive it is thought to be – also affect whether buyers are waiting for an opportunity to surge, or if they are wary of the speculative bubble.

  • Public perception

All currencies are affected by public perception, but not more than Bitcoin, whose security, value and longevity are at stake even at best.

  • Acceptance of bitcoin as a currency

The profile of Bitcoin – and trust in traditional currencies – will depend on its integration into new payment systems, crowdfunding platforms and more.

  • Integration by industry

Bitcoin is yet to be embraced by businesses around the globe and it remains to be seen how much impact a more influential player will have on the corporate stage.

  • Other key events

Any number of major events, including regulatory changes, security breaches, macroeconomic setbacks and more, could have serious consequences for the cryptocurrency.

How to trade 2020’s bitcoin halving?

Global stock markets have bounced back after they experienced a sharp downturn in March, with bitcoin gaining momentum, restoring its COVID 19-induced losses that reached $10,000 over the summer.

However, there was still the chance of countries that were experiencing a second wave of the virus, that could prompt another massive sell-off as investors move towards money supply. This had influenced cryptocurrencies, of course, much as it had impacted equities and securities.

However, there have been those who claimed that the present economic factors are relatively beneficial for the valuation of Bitcoin.

Amidst COVID-19 there are different approaches to trade bitcoins halving in 2020. You can infer on the price of cryptocurrency incorporating derivatives such as CFDs, or you can purchase coins directly through a transfer.

One of the key advantages when buying cryptocurrencies with securities such as CFDs being that you will not hold the underlying assets. This helps you to:

  1. A Deal without an exchange or wallet link.
  2. Go long or short, you should take a bitcoin role whether you want it to increase or decline in value.
  3. Full use of leverage, it allows you to achieve broad access to the stock sector while at the same time tying up a comparatively limited sum of your money.

What happened during the last bitcoin halving?

Bitcoin rewards last dropped on 9 July 2016 at the beginning of the second half – an incident that has seen the block incentive dropping from 25 new bitcoin per block to 12.5 bitcoin. Bitcoin’s price increased from $576 on 9 June 2016 (a month before the halving) to $650 at the time of the occurrence itself. Despite significant volatility, prices continued to rise over the next year, reaching $2526 on 9 July 2017.

A similar trend appeared on 28 November 2012 after the first halving as the payout for the bitcoin block fell from 50 to 25 new bitcoins. Prices rose from $11 a month on the day of the event itself before halving to $12, rapidly increasing over the course of the next year to reach $1038 on November 28, 2013.

Thousands of Bitcoiners across the world celebrated the 2016 halving. There were parties in tons of major cities and countries like Melbourne, Australia, Montreal, Canada, NYC, USA, London, UK, Dublin, Paris and dozens of other cities.

Next bitcoin halving

The Bitcoin halving is scheduled in block height, not date.

The halving happens every 210,000 blocks. The 2024 halving will happen on block 840,000.

Conclusion

Bitcoin has been developed to be beneficial. Different guidelines have been developed to facilitate this. Just a particular amount of bitcoin (21 million) would ever emerge, and economic growth is monitored closely by halting its dispersion through the halving procedure.

Yet another argument of Bitcoin’s design– which includes halving and a limited production capacity of 21 million coins– is that it promotes participants to save more instead of spending in the naive hope that coins will rise in value over a period. It might have fueled fluctuations in the past, with users accumulating coins only to cash out at key levels. Some argue that the design of the system has unequally remunerated those who got in the early stage of bitcoin participation.

References


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