What is Bitcoin Halving?

30.04.2020

Bitcoin Halving

The concept of “halving”, which we often hear in cryptocurrencies, means reduced (twice).  In crypto money markets such as Bitcoin, Litecoin, etc., it means that the rewards given to miners are halved in certain periods. As with other crypto currencies, Bitcoin is "halving" at certain times, that is, reducing twice .

Bitcoin halving is the process of dividing / halving the number of rewards produced per block, in order to maintain the total supply of Bitcoin and not exceeding the projected 21 million Bitcoins in total.  Block rewards are the most effective power in the operation of Bitcoin mining and the system.  In other words, in the Bitcoin market, the reward given to miners ensures that the system remains in continuous operation.  Bitcoin halving takes place approximately every 4 years and every 210,000 blocks, and reduces the reward by 50 percent each time with a geometric advance.  While the first block reward was 50 BTC in 2009, the current Bitcoin reward is 12.5 BTC.  The first of Bitcoin halving took place in 2012, and the reward is from 50 BTC to 25 BTC;  The second one took place in 2016 and the award was halved and decreased to 12.5 BTC.

The next Bitcoin halving will take place on May 12, 2020, and in the third half, the reward will drop to 6.25 BTC.  While Bitcoin halving is the main algorithm for controlling Bitcoins produced by mining, it is one of the most important parts of the system that successfully maintains Bitcoin without any authority.  The chart below shows the fluctuation of Bitcoin and the change in inflation rate.

Bitcoin Inflation

The price of Bitcoin depends on basic economic theory about how free markets work. The two main factors that affect the price are supply and demand. If there is more demand and less supply, the price automatically increases, and vice versa.

On this basis, we can say that Bitcoin's halving will reduce current supply on the market. This situation, based on the theory of supply and demand, is expected to have a long-term positive impact on the price.    However, demand also has a much stronger impact on the rate at which the price rises and disappears.

Rapidly rising global tensions, the US-China trade war and the weakening of many emerging economies (Turkey, Argentina, Venezuela) have led to increased interest in Bitcoins and other digital assets as an alternative form of managing non-policy assets. This leads to a potential increase in demand as digital assets are presented as alternatives to people around the world.

However, since people and their demands are unstable, even with the right theory, there may be a completely different outcome in real life. Nevertheless, one can draw a conclusion by focusing on the historical price impact of previous halvings. Looking at the diagram below, we can see the changes that occur after each halving. Bitcoin breaks up (in this case, it is necessary to refer to the genesis block as half of the equivalent event), and soon after it turns into a bubble, it is output with correction, then remains stable enough before the cycle repeats.

Bitcoin Halving

Based on the chart, we can say that the halving process will have a positive impact on bitcoins prices. However, it should be recognized that positive pricing will take place in the long term, and there are certain risks in the short and medium term. Thus, it is difficult to see the expected changes in prices for bitcoins immediately after the halving .    Because by halving the Bitcoins, it is possible to force the miners to abandon their activities or reduce their activities by calculating profits and losses. In addition, miners who want to cover their losses can sell their bitcoins in a short time. For these reasons, you should monitor the impact of halving bitcoins on the market and pay attention to a long-term solution. Otherwise, the probability of damage in the short term is quite high.