Halving is synonymous with Bitcoin and represents a phenomenon where the block rewards are reduced by half after every 210,000 blocks are mined, roughly translating to every four years. This will go on until all the 21 million Bitcoins have been mined from the network sometime in the next 100 years or so. Whenever the event takes place, the price of Bitcoin has rallied to higher levels than during the previous period.
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Importance of Halving
Halving is crucial on blockchains such as Bitcoin since it helps regulate the number of tokens entering the circulation. This is true to the token's deflationary nature, since there is a finite supply which may even gradually decrease as users lose or forget the keys to their Bitcoin wallets.
This is contrary to centralized fiat currencies that governments control. Especially with the coming of the coronavirus pandemic and its impact on economies, governments have had to engage in quantitative easing and money overprinting as they tried to resuscitate collapsing economies.
This leads to inflation, where the currency loses its purchasing power. Consequently, people feel they can't trust the currencies to as a valid store of value. In countries such as Zimbabwe or Venezuela, which have experienced hyperinflation, citizens buy and hold Bitcoin as a store of value thanks to its unique properties that see its price rise over time.
History of Halving
The Bitcoin network was launched on January 3, 2009, and the first halving took place on November 28, 2012, after the first 210,000 blocks were mined. The block reward until the halving was 50 BTC, before going down to 25 BTC.
It's good to note that at this time, since the network had not seen much adoption and the mining difficulty was pretty low, it was possible to use your personal computer to confirm transactions and win the block rewards. But as more people joined the Bitcoin network and introduced more specialized miners that had bigger processing power than a typical computer and more efficient, the mining difficulty went up, which made it harder to mine using less powerful machines.
Today it's impossible to mine Bitcoin on your own unless you have tremendous disposable income to set up a mining rig that can rival giant mining firms. You can still buy an efficient machine and set up your rig before joining a mining pool for a share of the rewards. Or you can buy a cloud mining contract and let someone else do the hard work for you, but here there are considerations you need to take; otherwise, you could lose your investment.
The next halving event took place on July 9, 2016, where the block reward dropped to 12.5 BTC before the latest event took place on May 11, 2020, where the rewards reduced from 12.5 BTC to 6.25 BTC.
Impact of Halving on The Price of Bitcoin
As mentioned above, statistics show that whenever a halving takes place, Bitcoin can attain a new price high sometime after the block reward halves. During the first halving, the Bitcoin market was non-existent, at least not as we know it. The person who gave Bitcoin its first real value was Laszlo Hanyecz, who offered 10,000 BTC for 2 large pizzas. Ten plus years later, those two pizzas would be worth $500 million. Anyway, after the launch of crypto markets, places where people would buy and sell crypto coins , Bitcoin traded as high as $1,000 around December 2013.
The second halving saw Bitcoin trade as high as $20,000 in December of 2017, and the latest halving has seen the price even reach greater heights. As of February 16, 2021, Bitcoin trades above $50,000. One constant throughout Bitcoin's short history is the fact that after every halving, the price reaches a new high. And within the following four years, even though it doesn't maintain the high, it will trade higher than it had traded in the previous sessions.
What Happens to Miners After Halving or Reduced Rewards
Miners are crucial to the Bitcoin network as they help validate transactions and secure the network. It's through mining that new coins are introduced to the network. However, the mining process involves the use of expensive and highly specialized equipment. It's also highly energy-intensive . For example, the latest ASIC miner ranges upwards of $3,000. And you need thousands of these to set up a profitable mining rig. The electricity cost is so high only individuals based in countries with the cheapest electricity can consider engaging in the activity.
With every halving, where the rewards to miners reduce, it means the price of Bitcoin needs to be high enough to help the miners cover their operational costs and remain profitable. Nakamoto envisioned since miners were an integral part of the network, even when the coins rewarded diminish, the network will have received enough adoption such that they will thrive on transaction fees.
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