The last bitcoin halving happened on May 11, 2020, and guess what? The market reacted massively to this. But what is bitcoin halving? Read on to learn everything you need to know about bitcoin halving. That said, to understand exactly what bitcoin halving is, we must first explain how the bitcoin network operates. This is super important for people just starting out.
The bitcoin network is powered by its unique blockchain technology, which comprises a collection of computers or what experts like to refer to as nodes. These computers or nodes power bitcoin’s software and contain a partial or complete history of transactions happening on the network. Each complete node or a node featuring the entire history of transactions on bitcoin is either responsible for validating or rejecting transactions on the bitcoin network. To perform its responsibilities, the node executes a series of checks to ensure that a transaction is valid. This will include double-checking and ensuring that a transaction has met all the right requirements like nonces and does not exceed the required length.
A transaction on the bitcoin network can only happen once all parties operating on the network approve such a transaction within the block on which the transaction exists. Once the transaction has been approved, it is added to the existing blockchain and broadcasted to other nodes. And just so you know, the bitcoin blockchain serves as a pseudonymous record of transactions. What we mean here is that every successful transaction executed on the bitcoin network is visible to everyone. Nevertheless, it is almost impossible to identify transacting parties. And this doesn’t come as a surprise to us, especially since we know that the bitcoin blockchain is designed to assign encrypted addresses to everyone transacting on the network. On the flip side, even people who do not participate as nodes or miners on the bitcoin network can still view transactions executed live by simply looking at block explorers.
With more computers or nodes added to the bitcoin blockchain, you can expect robust security and stability on the network. At the moment, there are at least 12,035 nodes estimated to be powering bitcoin’s code. Nevertheless, anyone can participate actively on bitcoin’s network, provided they have enough storage to download the entire blockchain along with the history of transactions.
Bitcoin mining is a complicated process where miners use sophisticated hardware to actively participate in bitcoin’s blockchain network either as validators or transaction processors. For the mining process, bitcoin uses a robust system called Proof of Work (PoW). This process validates that miners have put effort into processing transactions for which they are rewarded with newly created bitcoins. And just so you know, the Proof of Work system requires both time and the energy used to power the hardware in a bid to solve complex computational problems.
For a faster and hassle-free bitcoin mining process, many large bitcoin mining companies today opt for sophisticated hardware capable of yielding larger block rewards. As if that’s not enough, there are many companies out there today dedicated to building computer chips uniquely designed to improve the bitcoin mining process. These new and improved chips or powerful computers are tasked with processing bitcoin transactions. And for their job, they are rewarded with newly created bitcoins.
Not to confuse newbies, the term mining isn’t used in its literal sense. Instead, it is used in reference to the way precious metals are gathered. To find new blocks, bitcoin miners have to solve computational problems and confirm the authenticity of transactions executed on the bitcoin network. Once this is done, miners then add these transactions to a block, creating chains, or blocks of transactions, which gave birth to the term blockchain. Once a block is filled up with transactions, all miners responsible for processing and confirming those transactions within the said block are rewarded with newly created bitcoins.
It is important to note that large transactions need more confirmations, i.e., transactions with more monetary value. This is to guarantee security. The process of creating new bitcoins is called mining because of the work performed by miners to mint new bitcoins out of the code. We like to see it as the digital equivalent of what miners do physically to find gold and other precious metals out of the earth.
After every four years or once every 210,000 blocks are mined, the reward for finding new blocks is cut in half. With every bitcoin halving, the rate at which new bitcoins are released into circulation is reduced. Prior to the bitcoin halving on May 11, 2020, the reward for finding a new block was 12.5. But after halving, this reduced the block reward to 6.25. This is the network’s way of leveraging a synthetic form of inflation that halves every four years until the last bitcoin is released into circulation.
We will continue to see bitcoin mining until the year 2140. And even after that time, miners on the network will still be relevant as they will be rewarded with transaction fees for processing and validating transactions on the network. These fees are a brilliant way to ensure that miners keep the network going. And since there is always competition on the bitcoin network, we expect these fees to remain low long after there are no more halvings on the network.
Bitcoin halving is always a significant milestone as it marks another drop in bitcoin’s dwindling limited supply. Let us also add that there are only ever going to be 21 million bitcoins in circulation. As of the time of writing this post, there are about 18.81 million bitcoins in circulation. With this figure, it means that we have about 2,200,868 million yet to be minted via bitcoin mining.
Back in 2009, the reward for each block was 50 bitcoins. But with subsequent bitcoin halvings, the reward was reduced to 25, 12.5, and 6.25 bitcoins, coinciding with the last bitcoin halving on May 11, 2020. To put things in perspective, imagine that the amount of gold mined is cut in half every four years. Supposed the value of gold is based on scarcity, it means that halving will drive the price of gold higher.
Bitcoin halving is a system set in place to reduce the rate at which new bitcoins are created. Not just that, it also lowers the available supply. Without mincing words, bitcoin halving is a genius idea with some implications for investors especially when you compare it with assets like gold with low supply. To put things in perspective, any asset with low supply will enjoy massive demand, with prices reaching astronomical heights.
Historically, every bitcoin halving has resulted in massive surges in price. For instance, the first bitcoin halving, which happened on November 28, 2012, saw the price of bitcoin shoot up from $12 to $1,217 within a year. The second bitcoin halving that happened on July 9, 2016, saw bitcoin’s price rally from $647 to a staggering $19,800 within a year. While people were still basking in the Euphoria, the price of bitcoin plummeted from $19,800 to $3,276 by December 17, 2018. Despite the massive sell-off that followed, bitcoin was still up by 506% from its pre-halving price in terms of performance.
The most recent bitcoin halving happened on May 11, 2020. When the halving happened, bitcoin was selling for $8,787. But by April 14, 2021, the price of bitcoin had rallied to $64,507, a staggering 634% increase from its pre-halving price. Even though the number one cryptocurrency by market cap later retreated to $54,247 a month later, overall, bitcoin was still up by almost 517% from its pre-halving price.
While Tesla had earlier announced that it would be receiving payment in bitcoin for its models, the company rescinded its decision on May 12, 2021, with Elon Musk citing the environmental impact of bitcoin mining as the reason for the move. This caused some significant sell-off in the market, with the price of bitcoin plummeting further. Also, the announcement by Chinese regulators banning financial institutions and payment companies from providing cryptocurrency-related services caused another massive sell-off, with bitcoin settling at $40,000.
Even though these announcements may have spurred the massive sell-off, the price fluctuation is likely related to the halving behavior we have seen in recent years.
A closer look at the theory of bitcoin halvings and chain reactions sets off something like this:
Miners’ incentives aren’t going away, regardless of the smaller rewards, and that’s because we expect the price of bitcoin to rise astronomically during the process.
Unfortunately, if bitcoin halving doesn’t result in high prices and increased demands, miners will have no incentive. More so, the reward for validating transactions will be smaller, and the price of bitcoin will not be high enough to entice miners. To forestall such an event, bitcoin has a unique process to change the difficulty it takes to get mining rewards. So if bitcoin’s price remains the same after halving, with rewards now depleted, the difficulty of mining a transaction will still keep miners incentivized. So while halving means that the quantity of bitcoins released to miners for finding a block is now lower, the difficulty of processing a transaction is also reduced.
The process has proved pretty successful twice. So far, every bitcoin halving has resulted in a parabolic increase in price followed by a sharp drop. But despite the massive sell-off that comes after bitcoin halvings, history has shown that bitcoin’s price is still way above its pre-halving price. For instance, the 2016 bitcoin halving pushed the price of the number one cryptocurrency by market price to around $20,000, only for the price to settle at $3,200 by 2018. While this is a massive drop, the price of bitcoin after the sell-off wasn’t anywhere close to its pre-halving price of $650.
Sure, bitcoin halving has worked repeatedly to push the price of the number one cryptocurrency by market price higher; many experts believe that bitcoin halving is spurred by hype, incredible speculations, volatility as well as how the market reacts to these events.
The third bitcoin halving that occurred on May 11, 2020, happened in the midst of a global pandemic. Not just that, it happened at a time of increased institutional interest, heightened regulatory speculations, and celebrity hype. Given all of these factors, we aren’t exactly sure where the price of bitcoin will settle. But one thing is certain, the future is bright, and there is no better time than now to join the party.
The term bitcoin halving loosely translates to how many bitcoins are created when new blocks are found. When bitcoin launched in 2009, every block contained 50 new bitcoins. But with every bitcoin halving, the reward for finding a new block is reduced by 50%. And sure enough, bitcoin halves every four years. With the last bitcoin halving that occurred on May 11, 2020, the reward for finding new blocks was reduced from 12.5 to 6.25 bitcoins. So with the next bitcoin halving slated to happen in the next four years, we expect the reward for finding new blocks to drop to 3.125 BTC.
Even though bitcoin was launched in 2009, the first halving occurred on November 28, 2012, after nearly 10,500,000 BTC had been mined. The next bitcoin halving after that happened on July 9, 2016. While the most recent bitcoin halving happened on May 11, 2020, we anticipate the next bitcoin halving in 2024.
The bitcoin mining algorithm is designed in such a way that new blocks are found every 10 minutes. Nevertheless, as more miners join the network and more hashing power is added, the time to find new blocks is expected to reduce. But to make sure that the process runs smoothly, there is a system in place to reset the mining difficulty once every two weeks. This helps keep the time to find new blocks pegged at 10 minutes. But since the bitcoin network has grown astronomically in the last couple of years, the average time to find new blocks has remained below 10 minutes, precisely 9.5 minutes.
The price of bitcoin has increased tremendously since it debuted in 2009, when it traded for a few pennies or dollars, to April 2020, when the price of bitcoin rallied to over $63,000. While the forces of demand and supply drive bitcoin’s price, every bitcoin halving has resulted in the price of bitcoin doubling. More so, every bitcoin halving effectively doubles the cost to miners, who are the real producers of bitcoins. Bitcoin halving has a positive effect on its price because producers need to adjust their selling price to match their cost.
Historically, bitcoin’s price reacts positively to the news of halving many months before the actual halving happens.
By 2140, we expect the last 21 million bitcoins to be mined. Once this milestone is achieved, there will no longer be bitcoin mining or halving. So what happens? Well, at this point, miners will no longer get block rewards. Nevertheless, the system still has a way to incentivize miners to continue validating and confirming new transactions on the blockchain. More so, we expect the value of transaction fees paid to miners to rise in the future because we expect the transaction volume to increase dramatically. Plus, bitcoin should have a remarkable nominal market value then.
Bitcoin halving provides opportunities to make some decent profits. Once there is a halving insight, you can speculate on the price of bitcoin using derivatives like CFDs. You can also outrightly buy bitcoins across different exchanges and ride the wave up.
The upside of trading cryptocurrencies with derivatives like CFDs is that you don’t own the underlying coins. With this option, you can trade bitcoin and other cryptocurrencies without any exchange or wallet. With many brokers, you can start trading CFDs within minutes. Keep in mind that while trading CFDs with brokers, you don’t own the crypto asset or the underlying interest.
Another smart way to profit from bitcoin halving is to go long or short if you expect a sell-off or a big pump. That said, we strongly suggest going long as every bitcoin halving has resulted in a big move up.
You can also profit from bitcoin halving by taking advantage of leverage. With leverage, you can open a position by putting down a deposit. This allows you to get seamless access to a broader market exposure while only committing a small amount of your capital.
As we mentioned earlier, bitcoin halving allows bitcoin enthusiasts to make money by simply speculating the movements many weeks before the actual events. For newbies, contracts for difference is a brilliant way to speculate bitcoin’s price movement, and that’s because it allows you to either go long or short.
Nevertheless, always remember that every form of trading comes with its own level of risk. To this end, you must be wary of every opportunity to make profits. And yes, only invest money you aren’t scared of losing.
You can manage the risks associated with trading bitcoin by speculating BTC prices with CFDs. We like CFDs because it provides traders with a rare opportunity to leverage bitcoin’s price movement without having the coin in their wallet. With this, you have nothing to do with the risks associated with exchanges and wallets.
Historically, the price of bitcoin has risen astronomically after every halving, and that’s because of the hype, speculation, and interest enjoyed by bitcoin, many weeks leading to the main event. Again, bitcoin halving reduces the supply of new bitcoins that will be released into circulation. A look at past halving shows that bitcoin price rises significantly after every halving, and many traders have taken advantage of this unique opportunity to make decent profits.
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