We have grown accustomed to the fact that one particular topic returns every four years in the crypto community - bitcoin halving. Why does halving generate such excitement? As we have managed to observe, the value of bitcoin is driven by market mechanisms, so when the supply decreases - the price of the cryptocurrency increases.
Satoshi Nakamoto, in creating the Bitcoin Blockchain, envisioned a clever mechanism - every 210,000 blocks mined, or about every four years, there is a halving of the reward for mining a block - by half. This self-imposed halving mechanism has meant that the mining of all Bitcoin (of which there are 21 million in total), will spread out over time and last approximately until 2140.
If the supply reduction mechanism was not applied and the reward remained the same from the beginning (i.e. it would be 50 BTC for mining a block), we would dig up all the bitcoins within 7 years. In addition to the obvious spread over time, the mechanism also reduces inflation, which is currently around 1.7% (1.67% on 20 July 2021) per cent per annum.
Despite the fact that the cryptocurrency market is increasingly mature, multitudes of investors remember that when the halving took place, it was not long before the price of Bitcoin was inflated. Within a year of halving the cryptocurrency's issuance, its value in USD increased by as much as 8300%!
Increasing the price just the iceberg of the whole sequence of events that is triggered by halving in the Bitcoin network, but let's start by answering the question:
Decentralisation is the bitcoin network is both its greatest strength and weakness. With regard to lost bitcoin, the approach is also twofold. Because wallets are secured with the hand-perfect SHA-256 mixing algorithm, it is impossible to hack and steal cryptocurrencies that are out of circulation.
The guiding principle of cryptocurrencies is that everyone is their own bank. The lack of an overarching authority that cares about the security of our funds means that we ourselves (as users), must fulfil this obligation. In practice, this means that lost bitcoins can no longer be recovered - lost access to your wallet? The BTC in it is gone.
Through this feature, we have lost access to about 3-4 million BTC, which is currently worth $118,584,400,000 million. The accidental losses are a completely unforeseen deflationary mechanism of bitcoin, which indirectly contributes to the increase in the value of the cryptocurrency in the market.
You can access bitcoin on all cryptocurrency exchanges. However, we recommend you do it on EGERA, the first cryptocurrency exchange platform with instant identity verification, access to Blik, and support for fast transfers 24/7.
The first Bitcoin halving occurred on 28 November 2012. It was then that the reward was reduced from 50 BTC to 25 BTC per block mined. Within a year of that event, we saw bitcoin's first rally - the price rose from $12 (on the day of the first halving) to $1207 (November 28, 2013).
The second halving of bitcoin occurred on 9 July 2016, the reward for mining new blocks reduced to 12.5 BTC. How did the halving affect the price of the currency? The event caused the price to rise from $647 to $19,345 on 15 December 2017. The exchange rate underwent a correction in 2018, which does not change the fact that the price after the correction was 403% higher than before halving.
On May 11, 2020, the last halving so far took place, the prize decreased to 6.25 BTC, and a year later the value of one BTC had skyrocketed to $63,556, an increase of 651% over the pre-halving price.
The next supply reduction will occur around spring 2024. We cannot be sure whether the mechanism will again affect the value of BTC and take us to new heights, but knowing the history of previous halving and its impact on bitcoin's trading, the community of investors and those involved in cryptocurrencies is certainly looking forward to this event.
However, there is one group that, despite the price increase, will initially clench its teeth and lose some income by reducing the reward of digging into new blockchain elements (blocks) - miners.
To paraphrase Frederic Bastiat, in the bitcoin network there is what can be seen and what cannot be seen.
Seemingly, the whole process is simple - there is a reduction in reward, the supply of bitcoin decreases, and demand holding steady leads to an increase in the value of the cryptocurrency. However, what are we not seeing?
The job of miners in the bitcoin network is to confirm transactions and mine new blocks. Every 210,000th block the mining reward is halved, which has a direct bearing on how much money they are able to make from their mining.
It takes almost a year to go from halving to significantly increasing in value, meaning that mining is completely unprofitable due to the low value of the salary received. During this time, miners usually move on to other cryptocurrencies that are more profitable to mine.
As miners walk away from bitcoin, they simultaneously take away their Hashrate, with the result that the difficulty of mining decreases and profitability begins to rise again. The difficulty of mining bitcoin takes time to adjust, 2016 blocks to be exact, which means, 20,160 minutes - an equal two weeks of time.
For this reason, those mining BTC so far are trying to escape halving early so as not to worry about the reward for a period of a few weeks, but depending on how quickly the exchange rate rises - even months.
Let's compare the value of the ore
before and after the last halving, but remember that the value of the daily extraction is diluted across multiple independent miners and mining pools (where miners operate together), thus meaning that miners receive far less money than the value of the daily bitcoin extracted.
Halving cut the size of the rewards in half overnight - thus the value of the miners' daily earnings also halved, despite the service invariably provided - the provision of computing power.
Miners had to wait until November 17, 2020 to return to the pre-halving situation - among exchanges, the valuation oscillated around the $17,645 level, meaning that the value of daily BTC raised returned to the $15,750,000 level.
Surely the thought troubles you - when do miners rebound from their losses? Harvest time comes near each price record, from which the next halving is a long way off. See how bitcoin mining looked at the last two peaks.
Halving cut the size of the rewards in half overnight - thus the value of the miners' daily earnings also halved, despite the service invariably provided - the provision of computing power.
The EGERA bitcoin exchange is, according to many users, the best place to buy their first cryptocurrencies. We introduced our service to the market before cryptocurrency exchange offices became fashionable. Since February 2019, we have handled over a million transactions. Importantly, EGERA was the first bitcoin exchange and the cryptocurrency exchange received permission to operate payment accounts. This allowed, among others, to make payments to a secure bank account.
Around 2140 the last bitcoin will be dug up - halving bitcoin unfortunately cannot prevent this phenomenon, it is inevitable. However, despite the fact that miners will no longer receive new units of the cryptocurrency, there is still a second source of income left, namely the confirmation of transactions carried out in bitcoin's blockchain.
For many investors, this topic is not an issue - whether the last bitcoin mined will affect miners' earnings is unlikely to interest them - for them, cryptocurrency units are assets, not needed at all for transactions, but necessary as a means to store value.
To complete a transaction on the Bitcoin network, we need confirmations - and these (through the fact of decentralisation) can only be provided by independent nodes - miners. Currently (20 July 2021), miners receive 0.17 BTC for each block of confirmations. One block contains information on about 1,700 transactions, which means that per transaction a miner can receive 0.0001 BTC, which at the rate of $30,000 means $3 per transaction.
When there are no more BTCs, most miners will not stop mining cryptocurrencies - they will move to a more profitable option. Those that remain will likely raise the price for confirming transactions without changing the utility of the currency - bitcoins can still be used for transactions.
Halving every 4 years - this is approximately how long it takes to produce 210,000 new blocks, at the current rate, halving will occur at the end of May, but remember - 210,000 is 1,458 days (or 2,100,000 minutes), the speed of block production may change even slightly, and this will push back the halving date significantly.
One thing is for sure, a huge group of crypto-investors are rubbing their hands with the thought of the still distant (by the standards of the young cryptocurrency world) halving. For miners, a stable period between halving is more beneficial, when their reward is not in danger of sudden and drastic reduction.
The next split of the award will reduce it to 3.125. How much will the price have to rise for miners to maintain the award values of 10 May 2020?
So far, we have indeed been able to correlate the rise in price and the start of a bull market with subsequent diminution in reward, but in the crypto market there are many other factors that contribute to a change in valuation. Investors have their theories - they base fluctuations in value on all sorts of factors.
The event that undoubtedly contributed to the recent record in value was the global pandemic as a result of which citizens lost trust in governments and, in search of an alternative means of storing value to money, gradually switched to cryptocurrencies.
It is worth mentioning that it is not only cryptocurrencies that have seen an uptick in trading - the precious metals market has also seen an influx of fresh investors.
Table of Contents
