15 June 2020
Introduction to Bitcoin Halving
If you are a crypto enthusiast or keeping yourself updated with the latest news in the crypto space, you must have heard about Bitcoin halving. The third Bitcoin halving took place on May 11th, 2020, and it is considered one of the most anticipated events in Bitcoin history.
In this article, you will learn about the concept of halving and how it affects all of those involved in the crypto space.
What is a Block Reward?
To understand the concept of Bitcoin Halving, we must know what a ‘block reward’ means in the Bitcoin network. It is a well-known fact that every ten minutes, a block is mined and added to the primary Bitcoin blockchain. For every block validated, a certain amount of Bitcoins are rewarded to the miners as incentives. This is known as a block reward. Hence, new coins are injected into the market every ten minutes through mining; this maintains the supply of Bitcoins in the market.
Concept of Bitcoin Halving
In literal terms, halving means ‘reduced by half.’ So in the Bitcoin network, what gets reduced by half?
In the Bitcoin network, the block rewards are reduced by half at specific intervals to bring a balance to the supply & demand of Bitcoins. This process is known as Halving. In the Bitcoin network, halving typically occurs every 210,000 mined blocks. In other words, the incentives for the miners are reduced to half once every four years.
Why is it Important?
The value of any commodity appreciates or depreciates depending on its supply and demand. This basic economic concept is also applied to the Bitcoin protocol. As the incentives reduce with time, eventually, they come down to zero. The Bitcoin whitepaper mentions that the rewards will get to zero once supply reaches the mark of 21 million. Hence, 21 million is the maximum number of Bitcoins that can ever exist in the cryptocurrency market. At this rate, it is forecasted that the last Bitcoin ever will be mined in the year 2140.
The Halving Timeline
In the beginning, the block reward in the Bitcoin network was 50 Bitcoins. That is, for every block mined, miners used to get an incentive of 50 Bitcoins for validating a block successfully. Then, the first-ever halving occurred on Nov 28th, 2012. This has reduced the block reward to half, with miners getting 25 Bitcoins for validating a block. The second halving occurred on June 9th, 2016, and the block reward got reduced to 12.5 Bitcoins. This continued for the next four years until the third halving occurred on May 11th, 2020. Currently, the block reward is at 6.25 Bitcoin per block mined.
Interestingly enough, with each halving also comes the potential for increased gains. As time has told, there has been a definitive spike in the value of Bitcoin right after the occurrence of halving. In both instances, there is a double or even triple-digit percentage increase in Bitcoin’s value. This is the reason why traders and long term investors keenly look at the Bitcoin halving event.
It is crucial to know that the volatility of Bitcoin increases during the time of halving. So if you are a novice trader, it is recommended that you refrain from Bitcoin trading around the halving period and only consider speculating the markets once you see a decrease in volatility. We are saying this because, in the times of halving, the price shoots up, but this also leaves the market in an unstable and overbought condition. The price corrections happen right after, and the market settles at a much higher price than it was before halving.
For instance, the price of Bitcoin was around $700 before the second halving. Then it has shot up to $20,000 and came back down to approximately $3,500 after the halving finished and the dust settled. The settled price of $3,500 is the price at which we should be trading on the market and not at $20k. Therefore, risk increases during the time of halving and decreases after.
We hope you find this article informative and if you have any questions, please let us know in the comments below.