Understanding Bitcoin Halving: Impact, History, and Future Considerations | by Kevin Hernández | Coinmonks | Aug, 2023


Kevin Hernández

‍Bitcoin, the world’s most valuable digital asset, has an in-built feature that sets it apart from traditional currencies: a pre-determined, finite upper limit of 21 million coins. As part of its design, an event known as Bitcoin Halving occurs approximately every four years (210,000 blocks), effectively halving the reward miners receive for validating blocks of transactions.

This scarcity system is the stone on which Bitcoin’s economic proposal was built, since it eliminates uncertainty about its economy, and promotes a disinflationary model, so let’s understand it a little more.

Bitcoin Halving is a critical part of Bitcoin’s monetary policy, a feature embedded in its source code by its anonymous creator, Satoshi Nakamoto. The process involves the reduction of the reward for mining Bitcoin transactions by 50%, hence the term “halving.”

def bitcoin_halving(block_reward, halving_interval, block_height):
return block_reward / 2 ** (block_height // halving_interval)

Miners, the entities responsible for validating and adding transactions to the Bitcoin blockchain, receive a reward for their efforts. The current reward is 6.25 BTC per block, but this will change to 3.125 BTC per block in the next halving event, slated for April or May 2024.

But to control the supply, and for the halving to take place as scheduled, another mechanism is required. The difficulty adjustment, is a mechanism that aims to ensure that the time taken to mine a new block remains approximately 10 minutes, regardless of the total computational power of the network. The difficulty of mining a block — essentially, the effort required to find a new block — adjusts approximately every 2016 blocks, or roughly every two weeks. If blocks were mined quicker in the preceding period, the difficulty increases; if they were mined slower, the difficulty decreases.

The Bitcoin Halving is a deliberate design element intended to control inflation and maintain the scarcity of the cryptocurrency. By reducing the generation of new bitcoins, the halving event ensures that the total supply of 21 million coins is released gradually into the market.

Satoshi Nakamoto explained the concept in the announcement of the first Bitcoin release:

“Total circulation will be 21,000,000 coins. It’ll be distributed to network nodes when they make blocks, with the amount cut in half every four years.”

This feature of Bitcoin’s design highlights its decentralized nature, with automated processes controlling the coin’s distribution and emission schedule.

This contrasts with the economy guided by central banks, in which you cannot foresee, beyond the very near future, which way, the path that the monetary policy of a country may follow. Bitcoin, unlike the traditional economy, is not subject to modifications due to changes on the “current agenda”. You can know precisely how many units would be circulating at a given moment, and anyone with a node can verify it, which is becoming easier every day.

Historically, Bitcoin Halving has correlated with substantial price fluctuations. For instance, prior to the 2016 halving, Bitcoin’s price leaped to nearly $20,000 per coin in 2017. In 2020, Bitcoin’s price increased around 20% leading up to the halving in May, and by the end of the year, the price had gained over 200%.

While past performance doesn’t guarantee future results, the history of Bitcoin Halving suggests the event could fuel a price run. However, the price dynamics of Bitcoin are subject to a complex interplay of various factors, and the halving event is just one of them.

Anyway the first halving took place in November 2012, and although it had no immediate effect on the price, Bitcoin’s value began to gradually rise in early 2013, ultimately reaching a high of $1,100. The second halving occurred in July 2016, and while there was a surge in price leading up to the event, a price correction and a subsequent bull run later ensued, culminating in a peak of $19,700 in December 2017, perhaps the case with the longest delay in the reaction of the Bitcoin price post Halving was in 2020 with almost 6 months apart.

But all this is only a consequence of economic incentives, which can be better reflected in another factor that influences the price of Bitcoin.

The halving event has significant implications for Bitcoin miners, the entities responsible for adding transactions to the Bitcoin blockchain. Post-halving, the profitability of mining operations could potentially decline, leading some miners to pause investments in new hardware or even shut down less efficient operations.

However, the difficulty of adjustment would maintain a relatively constant rate of block production. Therefore, if fewer miners are participating in the network post-halving, the network reduces the difficulty of mining, thereby ensuring block production continues at an expected rate.

But there is another mechanism that can be foreseen by the miners. And it is the accumulation of Bitcoin, to reduce their circulation, and push Bitcoin price up, is a rudimentary method, with thousands of years old, and it has served miners just as well as farmers in the past.

In fact, the accumulation of Bitcoin Pre-Halving is a recurring phenomenon, currently “artisanal” mining has been greatly reduced, leaving mostly large operations, with a financial structure that allows a certain margin of resilience.

Looking towards the future, the next Bitcoin Halving, due in 2024, could trigger varied responses from different market players. While some anticipate a price rally, others warn of a potential price slump if mining becomes less profitable, leading to a decline in network security.

Regardless of the direction Bitcoin’s price takes post-halving, the event underscores Bitcoin’s unique value proposition as a scarce digital asset with a predictable emission rate. As the halving draws closer, market participants will undoubtedly keep a close eye on the event and its potential impact on the Bitcoin ecosystem.

While the halving event has historically correlated with price increases, it’s important to note that many other factors influence Bitcoin’s price. As we approach the next halving event, market participants will closely watch its potential impact on Bitcoin’s price and the wider cryptocurrency ecosystem.

In the end, understanding Bitcoin Halving is crucial for comprehending the workings of the Bitcoin market and the factors that impact its value over time. The event underscores the uniqueness of Bitcoin’s monetary policy and its potential to shape the future of digital finance.

Disclaimer: The information presented in this article is for informational purposes only and should not be construed as investment advice. Always conduct thorough research and consult a professional financial advisor before making investment decisions.

#Understanding #Bitcoin #Halving #Impact #History #Future #Considerations #Kevin #Hernández #Coinmonks #Aug