What is Bitcoin Halving? Definition, How It Works, Why It Matters

Trading Made Easy 2022-07-22 09:50:39

Bitcoin halving happens every 4 years as an digital form of inflation as Bitcoin is a finite resource


Table of Contents

  • Bitcoin mining
  • What's Bitcoin Halving
  • Bitcoin halving history
  • Why is bitcoin halving important to traders?
  • Conclusion


Ever since its conception in 2008, bitcoin has perplexed many traditional investors. It was created by an anonymous cryptographer who goes by the alias Satoshi Nakamoto. It's mind-blowing those bits and bytes of a computer network can be worth money and a lump sum, to be exact.

Bitcoin goes further than just bits and bytes. To know what Bitcoin halving is, we first need to understand how the Bitcoin network works.


Blockchain is Bitcoin's underlying technology which entails a digital ledger of transactions that are duplicated and dispersed across computers (or nodes) that run the software of Bitcoin. The collection of computers contains the complete or partial history of the occurring transaction on its network. 


A single node that contains the entire history of Bitcoin transactions is responsible for rejecting or accepting an occurring transaction on the bitcoin network. The node does this by conducting a series of checks, ensuring that the correct validation parameters are met.


Once the transaction is approved, it's added to the blockchain and dispersed to other nodes. The blockchain acts as an anonymous record of transactions, whereby anyone can see the content, but it is hard to identify the transacting parties. Transacting parties remain anonymous since the blockchain assigns encrypted addresses for every transacting party taking part.


Increased security and stability are ensured with the addition of more computers to the blockchain. Even though anyone can take part in the blockchain as a node, not everyone is a miner.



Bitcoin mining


Bitcoin mining is a process whereby a person uses their computer to take part in Bitcoins Blockchain networks like a transaction processor and validator. By using a system termed as proof of work, miners can prove the effort applied in transaction processing to gain a reward. The effort applied entails the energy and time it took to run and solve complex equations using computer hardware. Bitcoin miners provide solutions for mathematical equations and confirm transaction legitimacy.


After approval, the transactions are appended to existing blocks to create a chain to form a blockchain. Once a blockchain is totaled, transaction participants within the block earn bitcoins. This process is termed mining since it's like the digital equivalent of the effort applied in mining minerals from the earth.



What's Bitcoin Halving


Now, to the heart of the matter, Bitcoin halving is when the block reward is cut in half. When it was first released, Bitcoin miners earned 50 BTC rewards per block. This incentivized early miners to mine even before people could see what a success it would be. The rate of BTC creation was then cut in half after four years to 25 BTC per block.


After every 210,000 blocks equivalent to 21 million BTC, which is wholly mined for about four years, the block reward earned for transaction processing is cut in half. Halving is how bitcoins express a digital form of inflation that happens every four years; since there is a finite number of bitcoin that can be created, Bitcoin halving serves as milestones in its timeline, splitting it up into distinct periods.


Halving happens after every four years because the bitcoin mining algorithm is set to find a new block every 10 minutes. But once new miners join and add more hashing power, the time will decrease. Bitcoin will then remedy the situation by resetting the difficulty in mining once every two weeks to restore it to a 10-minute target.



Bitcoin halving history


The first halving occurred on November 28, 2012, where a total of 10,500,000 was mined. After which, the next happened on July 9, 2016, where a block contained 12.5 BTC. The last Bitcoin halving occurred on May 11, 2020, where BTC was halved to 6.25 BTC per block. The next halving period will occur in early 2024, whereby a block will be equal to 3.125 BTC. 



Why is bitcoin halving important to traders?


The value of bitcoin has significantly and steadily been rising since its launch. Halving has caused massive surges in Bitcoin's price, the first halving so that one BTC rose from $12 to $1,217. The second halving saw a drop in value to $670, but it then shot up to $2,550 in July 2017. Currently, Bitcoins price is $42,906.30. In simpler terms, bitcoins value tends to rise at some points after halving, and then sometimes there is a crash which can result in drawdowns.


The value might be stagnant for a while after the crash, but it picks when approaching the next halving. The explanation is an oversimplified form of how it occurs, but it outlines the events. This halving period affects trade and traders in that sense.


Surprisingly when the bitcoins hash rate goes down, the trading volume towers compared to the period right before halving. The volatility of BTC presents an opportunity for traders to invest or sell their BTC when it suits their valuation.


Investors can invest when bitcoin is at its low point and hold their coins until the time bitcoin value increases, which mostly happens after halving. Bitcoin halving causes price surges which attract newcomers or firms. Fluctuation in prices means traders can benefit from gaining new customers after halving occurs.


Since there are only 21 million BTC that can only be mined, there is scarcity, and as we know, absence presents an opportunity for providers. Especially with halving, the scarcity of accessing BTC coins is increased. This goes a long way to benefit traders since they will have a rare digital item of trade.





The expected date of the last bitcoin to be mined will be the year 2140. By this time, halving will have stopped. The value will still incentivize miners to continue confirming and validating transactions. The price of transaction fees is still expected to increase in the future, and this is because a greater transaction volume with costs will be appended, and bitcoins will possess a better market value.


Investing in cryptocurrency is speculative and sometimes risky; therefore, people should exercise caution. However, many people see cryptocurrency as the future of trade.


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