It’s no coincidence that the third Bitcoin halving event took place in a year when the popular alternative asset began its latest climb to new highs.
Sometimes jokingly referred to as “the halvening,” this was a major event for the world’s premier cryptocurrency.
Here’s a look at what happened on May 11, 2020, what Bitcoin halving entails and some context for how investors should think about it:
— What is Bitcoin halving?
— Why does it matter?
— The U.S. dollar and Bitcoin.
— When will the next halving occur?
What Is Bitcoin Halving?
A “block” on the Bitcoin blockchain is a file storing 1 MB worth of Bitcoin transaction records.
“Miners” compete to add the next block using specialized hardware to solve a hard mathematical problem, producing a random 64-character output called a “hash,” completing the task and locking the block so it can’t be changed. Miners earn bitcoins by completing these blocks.
When the cryptocurrency was first released, miners would earn 50 bitcoins (BTC) per block. “In this way, early adopters could be incentivized to mine the network, even before it was clear what a success it would be,” according to Edan Yago, co-founder of the Bitcoin-based decentralized finance protocol Sovryn.
Bitcoin halving is when the pace of new BTC creation is cut in half, which happens every 210,000 blocks mined, or about every four years, until all 21 million bitcoins are completely mined.
The first Bitcoin halving in 2012 slashed the reward for mining a block from 50 BTC to 25 BTC. In 2016, the halving event cut rewards again to 12.5 BTC per block mined, and as of May 11, 2020, just 6.25 new BTC are created with each new block mined.
Miners absolutely must “plan for the Bitcoin halving because it represents a near instantaneous drop in revenue,” says Caleb Chen, digital currency and privacy advocate at Private Internet Access. It’s a built-in feature of the Bitcoin system, one that has a dramatic effect on every aspect of the cryptocurrency.
Why Does It Matter?
Bitcoin buyers should be aware of this systemic feature as well, since a halving often comes with a large amount of turbulence for the cryptocurrency.
Sergei Khitrov, founder and CE? at Listing.Help, notes that “Coindesk analysts pointed to a surge in Bitcoin trading volumes immediately a month before and a month after each halving.”
It’s easy to see why — as Bitcoin halving takes place, the supply of available Bitcoins becomes smaller, thus increasing the value of the Bitcoins yet to be mined. And with those fluctuations come the chance to profit.
For some context, consider Bitcoin’s history. The first halving occurred on Nov. 28, 2012, when the price of a Bitcoin was a mere $12 — one year later, Bitcoin had skyrocketed to around $1,000. On July 9, 2016 the second halving took place — Bitcoin had fallen to $670 per coin by then, but it shot up to $2,550 by July 2017. In December of that year, Bitcoin peaked at a then all-time high of roughly $19,700.
As for the most recent halving, last May, Bitcoin was sitting at $8,787 — and in the months since, its price has exploded. Over the last few weeks alone the cryptocurrency has blown past all-time highs again and again, and currently sits at around $48,000. Its record high was set on Feb. 21, when it surpassed the $58,000 level.
Of course, there were other factors to consider when looking at Bitcoin’s booms after a halvening: increasing news coverage of cryptocurrencies and Bitcoin itself, a certain fascination with the digital asset’s anonymity, and a slowly but steadily growing list of use cases for the currency in the real world. That said, if you put any stock into the value of history, then the Bitcoin halvings of years past have been long-term bullish catalysts for the crypto’s price.
Then again, the third halving in Bitcoin’s short history is almost guaranteed to impact the Bitcoin ecosystem in other ways. Primarily, the number of Bitcoin miners is widely expected to drop as the economic reward for mining becomes less compelling and, for less efficient miners, unprofitable.
The U.S. Dollar and Bitcoin
So why halve the rewards miners receive in the first place?
It sounds like there’s less incentive for miners to chip away at the remaining blocks, but it’s actually a feature of the system.
“Satoshi Nakamoto (the pseudonymous creator of Bitcoin) anticipated that as the transactions fees generated by the network increased over time, the need for the miner subsidy would decrease – and built the pre-determined, diminishing rate of newly minted BTC with this in mind,” Yago says.
Khitrov agrees, noting that halving is one of the crypto’s key features. “Halving solves the issue of controlling cryptocurrency emission and also aims to curb cryptocurrency inflation,” he says. “The Bitcoin code automatically adjusts the release amount of the new cryptocurrency to postpone the emission end date.”
It’s serendipitous that Bitcoin’s first truly post-mainstream halving event should happen in 2020, a year that saw the U.S. increase its money supply in a sudden and unprecedented way, printing trillions of dollars to stave off a deep economic crisis. Of course, investors are beginning to see the effects of this unprecedented monetary policy with inflation and treasury yields both rising, causing the market’s most recent rally to stall out.
Bitcoin, on the other hand, is fundamentally deflationary — in fact, says Chen, “the Bitcoin halving represents a recurring manifestation of Bitcoin’s deflationary nature.” That has been the crux of the bull thesis for Bitcoin from the beginning: This decentralized cryptocurrency can’t be printed into obscurity by governments and their central banks, and the final supply is 100% known.
So When Is The Next Halving?
The days of free-flowing Bitcoins are gone.
All the “easy” Bitcoin has been mined; of the 21 BTC Bitcoins that can ever exist, more than 18.5 million, or nearly 89%, have already been mined and are in circulation. Roughly 900 new Bitcoins are mined and entered into digital circulation each day, though advances in computing power have led to faster mining rates, so it could be more than that.
As halvings continue over time, the pace of Bitcoin supply growth will continue to decelerate until all 21 million BTC are mined; projections have the last fractions of Bitcoin being mined in 2140.
There is no hard date for when the reward for mining a block will be cut in half. It depends on when the 210,000th block has been mined since the last halving.
Considering that new Bitcoins are mined roughly every 10 minutes, the next halving is expected to happen sometime in early 2024 — and on that unknown day, a miner’s reward will drop to 3.125 BTC. Bitcoin miners and investors alike would do well to start preparing now.
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Bitcoin Halving 101: What Is It and Why Does It Matter? originally appeared on usnews.com
Update 02/26/21: This story was published at an earlier date and has been updated with new information.