Bitcoin Halvening – a one stop guide

Bitcoin is a cryptocurrency that has become hard to overlook- regardless of your like or dislike for it! In less than a decade since its emergence, Bitcoin has gained immense recognition and it has paved the way for other crypto currencies to appear and sustain. Its continued existence has proved that regulated digital transaction is more than a fad. As an unregulated digital currency it continues to evolve. However, the mass perception about Bitcoin is still not very clear and a few myths and wrong notions about it exist. Not many are aware of an encoded feature of the crypto currency- which is known as Bitcoin halvening.

Getting the basics of Bitcoin halving clear

To understand Bitcoin halving, you need to understand how bitcoin is generated! A bitcoin gets generated when the blockchain gives reward to a group/ individual for transaction validation. The network offers Bitcoin to the miners for adding more blocks to its chain. This is like reimbursement for the expenses incurred in maintaining the network. Typically the miners sell the Bitcoins soon to cover overheads and so new bitcoin gets released in the crypto ecosystem.

The so called halvening occurs when the network cuts down the reward by a margin of 50 percent. This halving takes place at every 210,000 blocks, which translates to approx every 4 years. The Bitcoin miners currently get 12.5 BTC, equivalent of $43K every time they manage to mine a block successfully. The next halvening, scheduled for May 2020 will cut the reward down to only 6.25 BTC –equaling $21.5K.

It is not as scary as it seems

Initially, it may seem that owing to this ongoing and fixed schedule havening, the mining rewards will come down to zero after a time. However, on a closer analysis, the fear can be dissolved.

The regular currencies are regulated yet they are inflationary in nature. However, this is where Bitcoin differs. Its upper limit is fixed at 21 million. Once the network touches that threshold, no Bitcoin will get produced. The concept behind the scheduled and constant Halvening is to make sure Bitcoin does not get affected by high inflation. This is the brain child of Satoshi Nakamoto, widely acknowledged as the creator of Bitcoin.

To encourage Bitcoin’s sustainable growth, Satoshi opted for a logarithmic scale and based on that dates for halvening get set. So, despite 4/5th of Bitcoin supply getting minted within 10 years of its creation, the final Bitcoin will not be generated until 2140. So, the miners have more than a century for getting incentive if they participate in the network.

How can it have an impact on the prices?

Bitcoin halvening does have impact on the industry but not necessarily in a negative way, as has been seen during the previous halvenings.  In fact, traders think the events have potential for upside. It causes supply to dampen after all, thereby raising price digital assets. The tightening of supply eventually compels the price to surge upwards. It is also owing to the prospect of reduced liquidity affecting the market.

The cryptocurrency industry analysts think the miners act according to a demand shift for the bitcoins that are newly minted. As less bitcoins will get generated, the ‘per coin price’ will surely go up in the future. Of course, you will get to hear many other theories for bitcoin’s price rise. The third Bitcoin havening slated for May 14, 2020 may have similar impact but the analysts have adopted a wait and watch approach. As of now, roughly 1,800 new Bitcoins get mined per day but after May 2020, this number will get reduced to 900 a day.

The history of Bitcoin halvening (till now)

As already mentioned- Halvening of Bitcoin is a systematic and scheduled process. So far, two such halvenings have taken place and the third is due in first half of 2020.

  • The 1st Bitcoin halvening

The first halving of Bitcoin took place on November 28th, 2012. It went smoothly at block no 210,001. At that time, it was a nascent digital asset and lack of perception was even more. The major Bitcoin exchange was the now extinct Mt. Gox. After 1 year of this event, Bitcoin traded between the range $5-$15. On that day, half of all Bitcoins-10.5 million got minted in open circulation. The total market cap was approx $200 million.

In 2012, the daily minting of new coins reached 7,200 BTC- equaling $86,000 at that time. At that time, mining was done using GPUs and not ASIC units. After the crypto currency passed the first halving test with flying colors, the investors became more confident. The Cyprus financial crisis making many apprehensive of a 2008 type economic slowdown led to Bitcoin reaching an all time high. It reached $200 in 2013’s first quarter. It reached a 4 figure valuation by end of 2013 which was followed by a bear market. By early 2015, the currency was down to $200 mark.

So, the first ever halvening of Bitcoin was mostly about the protocol showing mathematical principles can be utilized to generate scarce digital asset. The event also proved halving the mining rewards will not misbalance the coin’s economics. It proved to be a growth catalyst for Bitcoin in the subsequent years.

  • The 2nd Bitcoin halvening

The 2nd bitcoin halving took place in July 9th, 2016. It, as planned, took place at the block number 420001. Compared to the first event’s timeline, Bitcoin reached a stage of maturity when the 2nd halvening took place. The daily trading volume reached $75 million. The Price was approx $400 and the market cap stood at $6 billion. Ahead of its 2nd halving, Bitcoin traded between $400- $450. At the time of halvening, its price reached $650. After a few weeks, the price dived to $550. At year end however, Bitcoin price reached a peak of $1000.

In these years, Bitcoin’s mining network underwent steady growth. Bitcoin mining turned professional and ASIC hardware became a prerequisite for it. It was a far cry from the hobbyist mining operations that used to exist just 4 years back! It became clear that the miners are serious and they wanted to maintain bitcoin’s price at a stable level. It became necessary as investment cost in hardware and cost of running the setup grew by several notches. The success of the first halving helped the traders prepare better for the 2nd event-as it was evident. They were also better prepared to cope with post halving dump and pre-halving pump. However, the high price of bitcoin again nose dived after some months of the 2nd halving.

  • The 3rd Bitcoin halving: May 2020

After a bull run in 2017, Bitcoin underwent upheavals in 2018. The price and its mining hash rate plummeted only to recover. However, 2019 has turned out to be optimistic for the crypto currency. This is owing to the evolving and maturing blockchain market and China embracing this technology with great zeal. The news of Facebook unveiling its own crypto currency has also helped Bitcoin gain to an extent.

It is estimated that during the upcoming/3rd halving event, almost 87% of all the bitcoins will get into open circulation. So, essentially, the miners will have to deal with remaining 12.5% in a course spanning 120 years. The next halving will cause Bitcoin’s yearly inflation rate drop from 4% to 2 percent. So, Bitcoin is going to have a lower yearly inflation rate than the conventional and regulated currencies. However, the impact on price will take some time to be felt.

What the future looks like?

While Bitcoin is volatile to an extent, it has also become more predictable than what it was even 5 years back. So far, the historical precedent of Bitcoin appreciating the value before and after the halving is there and there is scope for some fluctuations as well.

During the first 2 halvening cycles of Bitcoin some wild fluctuations took place. The fluctuation is applicable for mining hash rate and price of bitcoin. However, previous halvening cycles may not be exact precursors of the 3rd one. During the last halving event, the number of bitcoins being mined per day got halved and that will again be repeated. However, the price did not move much. The network did not get much affected and overall hash rate did not alter either.

During both the halvening events, not all speculations came true. Not all miners switched off their equipments in fear of getting less rewards. However, it is also true Bitcoin in 2019 is on a different level! Now, turning profit using mining has become way more tedious than the past. So, some developments post the 3rd halving are likely to be unpredictable.

Summing it up

The Bitcoin halvening events are crucial for the currency to remain sustainable and immune to the effects of inflation that affects most conventional currencies. While the number of minable bitcoins will reduce gradually, there is plenty of time. In more than 100 years, the Bitcoin technology will mature by leaps and bounds. So, new methods to let bitcoin remain functional after 2041 may emerge.

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