Posted 2 months ago | by Catoshi Nakamoto
The Bitcoin halving has been a catalyst for every bullrun we’ve seen in the history of crypto. Knowing about bitcoin halving, and its historical effect on the crypto market, gives us clues as to where we are in the current market cycle, when the best time is to invest and take profits, and where market prices might go from here.
My name’s Ben, and today I’m diving into Bitcoin halving: what it is, what it does, and how it affects the price. Let’s get it.
Bitcoin halving is an event where the reward for mining bitcoin is cut in half. When the first Bitcoin was mined in 2009, the reward for solving a block was 50BTC. There have been three halving events since. In 2012, the reward was halved to 25BTC and in 2016, the reward was cut to 12.5 bitcoin per block. The most recent Bitcoin halving took place on May 11, 2020, where the reward was reduced to 6.25 Bitcoin.
To understand the halving, we first have to understand bitcoin mining. Mining for bitcoin is when people use computing power to process and validate transactions on the bitcoin network. It’s it the basis for network security. Bitcoin is proof-of-work, which means that miners are rewarded with bitcoins for the work, cost and equipment required to process transactions.
When computers are mining bitcoin, they solve mathematical problems and confirm transactions. These transactions are then added to a block, which creates a chain of transactions. This is what forms the backbone of a term we all know: blockchain.
We don’t know who Satoshi Nakamoto, the founder of bitcoin, really is, but we do know that this person, or group of people, programmed the halving into the bitcoin blockchain to regulate mining rewards and increase the asset’s scarcity over time.
These are complicated ideas first introduced by the bitcoin network, and copied by many proof of work blockchains that have emerged since. Nothing explains mining and bitcoin better than the Bitcoin Whitepaper, which by the way, is worth a read.
The Whitepaper explains that block rewards are the reason that anyone would want to be a “node”, as miners are called in the whitepaper, on the bitcoin network. And that reason is: financial rewards. nodes help secure the network and put more coins into circulation. The first transaction in a block starts a new coin owned by the creator of the block, and the reward creates the incentive for nodes to support the network, and provides a way to initially distribute coins into circulation. The document compares gold miners using resources to add more gold to circulation, to CPU time and electricity resources being used to get more bitcoin into circulation.
Since Bitcoin mining became the profitable industry it is today, GPUs (or, graphic processor units), have replaced CPUs, which now have been replaced again by specialized chips called ASICs, which specialize in hash calculations. The first bitcoins were mined by Satoshi Nakamoto on January 3rd 2009, using a personal computer. Solving a puzzle is a brute-force effort, in which a computational device tries a computation over and over until it finds the answer. Over time, and with increasing competition, the difficulty of the algorithm increased in order to secure the network and using a PC wasn’t powerful enough so GPUs and eventually ASICs became the norm. We’ll get into hashrate difficulty later.
The whitepaper goes on to explain that since the rewards will decrease over time , starting at 50 bitcoin per block and halved every four years, transaction fees are introduced as a secondary incentive to miners. This makes sure that the miners we rely on to validate and secure the network will have incentive to stay active on the network, even once all 21 million bitcoin have been mined. This will occur sometime in the year 2140.
Incentivising miners to continue validating the network indefinitely hinges on the value of Bitcoin going up over time, which is the trend we’ve seen for Bitcoin so far. When the first Bitcoin was traded in July 2010, the price of one BTC was point 0008 cents. The price has gone parabolic since, reaching an all-time high this past November, of sixty-nine thousand and forty four dollars. If upward price trends continue over time, validating the network for transaction fees will still be profitable, even if the transaction fee average stays the same as it is now, which is about 0.15BTC per block.
Halving was built into the network to increase scarcity, and it also creates a secondary benefit that increases the price of Bitcoin: halving mining rewards creates new buzz for the asset and causes investors to get excited about investing in Bitcoin again. The months after each halving are usually followed by bullruns, where we see the price of Bitcoin and the broader crypto market increase dramatically. Reducing the amount of new bitcoin coming into circulation creates scarcity, which is the cornerstone of supply and demand economics.
From the first halving in November 2012, the price rose from 11 dollars and 50 cents, to two hundred and seventy dollars. Following the next halving in July 2016, the price went from six hundred and fifty dollars to about twenty thousand dollars per bitcoin by December 2017. In each case, the price appreciated over twelve-thousand percent, and each time it took roughly twice as long to experience the same growth.
The third halving started the most recent Bitcoin bull run in May of 2020, where by December, the price had seen an over 300% increase since the beginning of the year. The price started at nine-thousand six hundred dollars, and saw heights of just under thirty thousand dollars. In 2021, Bitcoin doubled in value to sixty-four thousand dollars per bitcoin, but saw a massive drop in 2022 that erased most of the gains seen that year. Bitcoin attempted another price jump in November of the same year when the price saw a new all-time high at sixty-eight thousand USD, but by January 2022, the price had dropped back to thirty-five thousand again.
Whether we’ve seen the end of the bull run following the third halving still remains to be seen. Some analysts believe that we are now in the bear market, while others believe there will be more upside for this bull cycle. Only time will tell.
If halving cuts miner rewards miners in half, which decreases inflation and lowers the available supply, what if a halving does not increase price demand? Will miners continue validating the network with half the incentive, and no dramatic increase in the price in USD?
A safeguard for this has been programmed into the network: a change in difficulty to get mining rewards. When the reward has been halved and the value of BTC doesn’t increase, the mining difficulty is then reduced. This keeps miners incentivized because they can mine more bitcoin in a shorter amount of time. Conversely, mining difficulty increases when market conditions are bullish and there are more folks trying to mine Bitcoin, which means more competition, so the rate of blocks being made needs to be maintained.
Although the price of Bitcoin has historically seen major price crashes following the halvings and their subsequent bull runs, the price has always settled higher than before the halving event. When the price of Bitcoin dropped from 20K to thirty-two hundred dollars in 2017 to 2018, this was still much higher than the price before the halving, which was six hundred and fifty bucks.
Still, the effect of the halving for investors is different from the effect on miners. For investors, the halving means increased prices and reduced supply. Many people who have been in crypto for a long time see the halving as a great entry point to get ahead of the market and invest in bitcoin and other crypto currencies after a long, boring bear market.
For miners, the halving means diminishing rewards, making it more difficult to compete against larger mining operations that have a better chance at solving a block.
Afterall, mining is a competition, where one miner will win the full reward of solving a new block. When large operations of miners come together in mining pools, they share the reward for mining a new block, making their profitability much higher, and giving them a greater chance at solving the block. The price increase that benefits investors also benefits miners though, because when they do receive a reward, its value in dollars is higher.
It’s possible that in the future, the halving and the competition that comes with it could increase the probability of a 51% attack on the bitcoin network. A 51% attack is when a group of people gains control over 50% of a blockchain’s hashing power. Bad actors could then prevent transactions from getting confirmed, and halting some or all payments. This would allow them to reverse transactions, and double-spend coins. That’s why we need halvings to initiate price increases, and difficulty adjustments to increase and decrease rewards, to keep a wide variety of miners incentivised to continue validating transactions, and securing the bitcoin network.
Afterall, if the price of Bitcoin continues on an upward trajectory, even the fees for validating transactions on the Bitcoin network will be incentive enough to keep miners working in the industry, and keep the Bitcoin network secure.
That’s the scoop on halving. I hope you’ve learned a little more about what it is, why it’s been programmed into the bitcoin network, and what it does for the bitcoin blockchain and the price of the very first crypto asset: BTC.
That’s all I got! Be blessed, Bitboy out.