What is The Bitcoin Halving and What Impact Will It Have on the Crypto Market?

As a result of its emergence in 2009, Bitcoin has changed the way people think about how they make money online, as well as how they pay one another for goods and services. The value of Bitcoin is a result of its limited issuance and complexity of mining, which makes it the most expensive cryptocurrency currently available on the market. One of the most anticipated and significant developments in the Bitcoin network is the process of reducing the rate of new coin generation.

The purpose of this article is to explore what Bitcoin halving is and what its purpose is. The article will also discuss how the process of Bitcoin halving works, what its implications for the crypto market are, and whether there are potential risks that this event can entail.

KEY TAKEAWAYS

• The process of halving Bitcoin is a halving of the rewards miners receive for mining.
• Halving helps to slow Bitcoin's inflation, boost its value and price, and strengthen the decentralization of the blockchain.
• Bitcoin halving occurs every 210,000 blocks every four years, reducing the reward of miners by two times.

What is Bitcoin Halving, and What is Its Purpose?

What happens when Bitcoin halves? Bitcoin Halving is an automatic decrease in profitability from an activity called mining, as a result of which, for each mined block in the network, miners receive half the reward for the same amount of time spent on its mining. A block on the Bitcoin blockchain network is a file that stores 1 MB worth of Bitcoin transactions. Mining and halving occur not only for Bitcoin but also for many other coins, such as Litecoin, Zcash and BitcoinCash.

The halving process is a significant element within the Bitcoin ecosystem and is a powerful mechanism, the practical application of which allows you to achieve several important goals in maintaining the stable and uninterrupted operation of the Bitcoin blockchain.

1) Slowing Inflation

The main goal of halving is to curb the cryptocurrency inflation rate by reducing the issue of new coins proportionally. The algorithms of cryptocurrencies like Bitcoin do not allow you to print an infinite amount of money. The supply of Bitcoin is limited to 21,000,000 coins. Due to the halving mechanism in the Bitcoin network, the supply of coins is growing progressively and noticeably inferior to the growth rate of demand for them. Each time a halving occurs, the issuance rate of new coins decreases, which balances the growth in the currency supply and prevents unlimited inflation.

2) Stimulating the Growth of Cryptocurrency Value

Bitcoin halving directly affects its value change per unit of time. Each halving decreases the flow of new coins into circulation, increasing the price of Bitcoin — supply decreases while demand continues to rise. This phenomenon is an economic law that works not only in the crypto market but also applies to other financial markets and trading instruments. Bitcoin's price is expected to rise exponentially, with each halving as mining approaches the maximum number of coins that can be mined online.

3) Strengthening Decentralization

Bitcoin halving also helps strengthen the decentralization of the digital asset blockchain because, after each decrease in the number of rewards for a mined block in the network, miners must work harder and more efficiently to be able to receive the same amount of block rewards as before. As the crypto mining industry, especially within Bitcoin, develops at a very rapid pace, halving can also help increase the number of miners, which increases the security and reliability of the entire network.

FAST FACT

• According to calculations, the Bitcoin Halving will end in 2140, when the last coin out of a total of 21,000,000 coins will be mined.

How Does Bitcoin Halving Work?

The concept of Bitcoin halving is inextricably linked with mining, which requires Bitcoin miners — users with programming and crypto industry knowledge who use powerful equipment to solve cryptographic equations and add new blocks to its blockchain — to generate new blocks in the network and increase the total supply of coins in the crypto market (emission). For their activity, which is considered the only way Bitcoin is issued, there is a special reward that is periodically halved as well.

To create a freely marketable digital currency (not tied to the dollar, gold, or another measure of value), there must be a shortage of such currency, which in the digital environment means designing the system for its accumulation so that mining of digital assets becomes a complex "puzzle" that requires a laborious and time-consuming process to find a solution. Each miner who successfully solves the "puzzle" is allowed to record a set of transactions and receive a reward in the form of cryptocurrency, and the more resources and effort a miner spends to obtain this reward, the more chances he has to solve the "puzzle" faster than his competitors, which encourages miners to invest in the mining process and ensures that cryptocurrency production is decentralized. Thus, mining is done in a competitive environment.

The process of halving Bitcoin happens every 210,000 blocks (or about every four years). In 2009, the remuneration of miners reached 50 BTC. On November 27, 2012, the first Bitcoin halving occurred — the number of coins dropped to 25 BTC. On July 9, 2016, when the second Bitcoin halving event occurred, the mining rewards dropped to 12.5 coins. Finally, on May 11, 2020, the last third halving occurred — the reward was halved again (to 6.25). At the next Bitcoin halving, the block reward will be 3.125 coins. A total of 32 Bitcoin halvings are programmed in the network, and as soon as 21 million BTC is released, the mining of coins will be stopped immediately. The fateful event is expected around 2140.

So, under the Proof-of-Work algorithm, miners create new blocks by performing mathematical operations. Miners receive new Bitcoins as a reward for their work. They also replenish the circulating supply of coins on the market, significantly affecting the price. Accordingly, halving influences the financial well-being of individual miners and the overall macroeconomic situation.

What are the Consequences of Bitcoin Halving for the Crypto Market?

Historically, the entire cryptocurrency market directly correlates to the Bitcoin price. Each halving of the coin, reducing the amount of remuneration to miners for mining new blocks and thus increasing its value, has a huge impact on both individual investors and the crypto market as a whole. After each Bitcoin halving event, its price grew significantly over the next 6–12 months, reaching new record highs in each cycle.

Consequences for Miners

Cryptocurrency mininggenerates mining fees when a transaction on the chain occurs. Since many miners find the next valid block at intervals of every 10 minutes, the block reward becomes a payment to the miner in exchange for creating a block in the agreed-upon chain.

As a rule, after each Bitcoin halving, the miners' remuneration is significantly reduced, namely by half, which not only automatically reduces the profitability of mining but also increases the cost of the power required for the halving process. An increase in the cost of equipment for mining a coin can negatively affect the performance of private miners compared to mining companies since, in many cases, the former do not have enough cash and other resources compared to the latter.

On the other hand, halving fuels miners' interest in altcoins, as their mining conditions may be much more economically and technically attractive. This will contribute to the rapid growth of those altcoins, their market capitalization, and their overall importance in the cryptocurrency ecosystem.

Consequences for Investors

The investment attractiveness of any asset is dependent on the future prospects of its growth. The value of Bitcoin is unquestionable, and its reliability has been proven over time, which makes it the most expensive crypto asset on the market. Nevertheless, with every halving, the price of the coin is growing rapidly, which forces many investors to reconsider their views on the purchase of this asset due to the lack of capital for its acquisition. As a result, many market participants are diversifying their investment portfolios and buying other assets which, in theory, have greater prospects for growth and development in the future.

Consequences for Crypto Market

The fact that the price of Bitcoin directly impacts the market may seem like a non-obvious point to some, but it is true. Since today, Bitcoin is the most popular currency on the market and, as a result, the most attractive trading instrument due to high supply and demand indicators, changes in its price have a bell effect on the entire crypto market.

Since Bitcoin is considered to be a kind of benchmark in the crypto world and the main reference point for the direction of movement of market sentiment, one can observe serious changes in the value of many altcoins with fluctuations in Bitcoin's exchange rate. The increase in interest in individual coins occurs against the backdrop of their increasing or decreasing in relation to Bitcoin. Altcoin value changes are observed not only after each Bitcoin halving but also in response to news and other factors that affect BTC prices directly or indirectly.

Are There Risks Associated with Bitcoin Halving?

A systematic 50% reduction in remuneration for the work done is associated with certain risks. Despite the positive impact that halving has on the Bitcoin blockchain, it also carries certain negative consequences, which can be expressed in the following:

Reducing the Number of Miners

As mentioned earlier, the main driving force behind mining new coins are rewards received for each block mined. The decrease in the remuneration provided to miners that occurs at every halving can make Bitcoin mining less profitable, leading to a decrease in hash rates. This could make Bitcoin less secure, as there will be fewer miners to process transactions and protect the network.

Since the difficulty of mining increases with each halving, it is assumed that in order to solve the problem of decreasing hash rate, methods will be applied to increase the overall power of the equipment by expanding existing equipment or using different algorithms in the form of programs and services.

Increasing Centralization

To date, Bitcoin is considered the most decentralized digital coin, the control of which is completely excluded from ordinary investors, companies and government agencies. The unfortunate consequence of the halving in the form of an outflow of active miners in the network can provoke the market to move towards a more centralized system, in which a significant part of all mining power will be controlled by several large pools, which can create a potential risk to the stability and security of the network. As a result, it will become more vulnerable to manipulation and hacker attacks.

Conclusion

The Bitcoin halving is undoubtedly a significant event taking place in the blockchain. It plays an essential role in ensuring a stable balance between supply and demand for Bitcoin. Acting as the main mechanism for regulating the emissions of the first crypto asset, halving helps to create favorable conditions conducive to both equal competition between miners and profitable trading in the crypto market.