Welcome to another edition of Crypto Explained. We are on the mission of making crypto easy for everyone. If you’d like to learn more about the world of crypto, don’t forget to subscribe to receive this Newsletter directly in your email!
Before we get into today’s topic, if you are not familiar with Bitcoin, here are two articles we recommend you read:
With these 2 articles, you should get some solid understanding of Bitcoin.
So let’s jump into today’s topic!
What is Bitcoin halving?
Bitcoin halving, also known as the "halvening," is an event that occurs approximately every four years on the Bitcoin blockchain.
It is a programmed adjustment to the Bitcoin protocol that reduces the rate at which new Bitcoins are created and introduced into circulation.
Why “halving”?
Because during a Bitcoin halving event, the number of new Bitcoins generated in each block is halved.
Has there been any halving before?
Yes, of course:
The genesis block, aka the first block, was mined in 2009, and the initial reward was 50 Bitcoins per block.
In the first halving in 2012, the reward was reduced to 25 Bitcoins per block.
In the second halving in 2016, it was further reduced to 12.5 Bitcoins per block.
The third and most recent halving occurred in May 2020, reducing the reward to 6.25 Bitcoins per block.
When is the next Bitcoin halving event?
The next Bitcoin halving is projected to occur in 2024 when the block reward will be reduced to 3.125 Bitcoins per block.
What’s the point of doing this?
The purpose of the halving is to create a controlled and predictable issuance schedule for Bitcoin. It is one of the core mechanisms that make Bitcoin a deflationary currency.
In a nutshell, by reducing the rate at which new Bitcoins are created, the halving event gradually slows down the supply growth and creates scarcity.
And based on supply and demand rules 101, scarcity creates value (provided there is demand, of course).
So is there any impact on the price?
Bitcoin halving events are closely watched by the cryptocurrency community given that they can have an impact on Bitcoin's price and market dynamics.
The reduction in the rate of new supply entering the market, combined with growing demand, has historically led to increased upward pressure on the price of Bitcoin. However, it's important to note that the relationship between halvings and price movements is complex and influenced by various factors, so please do you own research.
What’s the impact on Mining?
If you don’t know what mining is, here is an article to help you get a quick summary: What is Proof of Work and Mining in crypto?
Now, coming back to the significant implications for Bitcoin miners…
Bitcoin is created with every new block that gets added to its chain (hence, blockchain), and part of the Bitcoin generated in this process is rewarded to the miner that has contributed to the creation of the block.
Since the block reward is halved, miners receive fewer newly minted Bitcoins as a reward for their mining efforts.
This reduction in block reward affects the profitability of mining and can impact the mining ecosystem, as miners need to adjust their operations and account for potential changes in revenue.
Now - there is not too much concern around this as it is expected that with the increase of price in Bitcoin, even if the amount of reward is reduced, the actual value of it would be good enough of an incentive.
Word of Caution…
It's important to note that while halvings have historically coincided with significant price increases, there are various other factors at play in the cryptocurrency market, such as market demand, adoption, investor sentiment, and macroeconomic conditions, which can also influence the price of Bitcoin.
Therefore, the halving should not be seen as the sole determining factor for Bitcoin's price movements, and it's essential to consider the broader market dynamics.
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