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What is a Halving and What are its Impacts on Bitcoin?

A halving is a periodic event that occurs on a blockchain with the objective of halving the rewards awarded to miners. To celebrate, or not, let’s understand what a halving is and the consequences it can have on Bitcoin, as on other cryptocurrencies.

What is the process by which fresh Bitcoins are created?

Before we get too carried away, it’s important to note that the maximum number of Bitcoins that can ever be in circulation has already been fixed. Satoshi Nakamoto came up with the figure of 21 million in his white paper, which he published. Only 19,018,168 of the total (19,018,168 as of this date) are in circulation. However, new coins are introduced onto the market every ten minutes.

The rookies are distributed to miners in exchange for the effort that they perform to keep the network secure and safe. Cryptocurrency miners are the machines that carry out calculations in order to validate transactions on the blockchain network. These computations serve as a Proof of Work, which attests to the legitimacy of the transactions included in them (in the context of Bitcoin). However, there is no such thing as a free lunch. Miners are dissatisfied with their status as Bitcoin’s heirs. Obtaining this proof of work comes with a price tag.

For those who choose to embark on this journey, mining-specific computers and the electricity they require are a significant expenditure. In exchange for their involvement in the benefit of the blockchain, they are paid in bitcoins. So, every ten minutes, after the validation of each new block, the quantity of bitcoins in circulation increases, and so does the value of a bitcoin.

What exactly is a halving?

As of right now, the algorithm rewards miners with 6.25 BTC for each block that is validated by several miners, which is distributed among them. However, this rule will be changed in the near future. Bitcoin will experience a halving in 2024. The number of bitcoins awarded to miners will be half, from 6.25 BTC to 3.125 BTC. This is not a coincidental occurrence. It occurs on a regular basis. Satoshi Nakamoto has planned a halving every 210,000 mined blocks as part of his original design.

This event, which is causing consternation in the cryptocurrency world, will be the third in the history of Bitcoin. The first was in 2012, when the rewards were reduced from 50 bitcoins to 25 bitcoins.

What are the implications of cutting the miner’s rewards?

The first and most obvious result of a halving is a reduction in quantity. As a result, the supply of the applicable coin is reduced by half. The most straightforward explanation that can be drawn from this observation is as follows: halving the supply of bitcoins available will result in an increase in the price of bitcoin.

This is due to the fact that the price of Bitcoin is decided by supply and demand, and in this situation, the selling pressure (which comes only from miners, not from the rest of the world) is reduced. However, this price increase will only occur if the demand remains constant or is stronger than it was before to the halving, and provided the holders or traders do not opt to sell at the same time that the demand increases.

As you might have noticed, if you have been in the market, halving of the bitcoin price was followed by an increasing trend in the value of the cryptocurrency. However, not everything is as straightforward. Consider the examples of Bitcoin Cash and Litecoin. Both cryptocurrencies had a price decline following their respective halving days, and a declining trend was noticed in the market for both. For the time being, the BCH case is too new to draw any clear conclusions.

Furthermore, its value had increased by more than 30 percent in the week leading up to the occasion. Furthermore, the half of the LiteCoin price was followed by a continuous decline in the value of the cryptocurrency.

The Second Halving!

The second consequence of halving is one that is qualitative in nature. Following a halving, the hashrate, or the processing power of a blockchain, may be reduced as a result of the reduction. This indicator makes it feasible to assess the amount of computational power that miners must contribute in order to validate transactions and, in return, reap the benefits of rewards. A decrease in hashrate is associated with a decrease in the security of the blockchain.

When the hashrate of a transaction lowers, the resources required to validate transactions decrease as well. As a result, this occurrence naturally draws new miners who want to take advantage of the more easily accessible incentives that are available. The entrance of these new miners results in an increase in the hashrate as a result of the increased demand. It is vital to allow for an adjustment period in order to achieve a balance between the price of cryptocurrency (such as Bitcoin) and the price of electricity needed to validate transactions.

Bitcoin’s hashrate had significantly decreased following the crash that occurred in mid-February. Since then, the price has been steadily increasing. Given the reduction of the price, is this a positive sign for its future? I’ll leave it up to you to establish your own opinion on the matter.

Conclusion

It is expected that the next Bitcoin halving day will occur in 2024. This significant event in the cryptosphere is resulting in a significant amount of ink being spilled. Many people are attempting to forecast the price trend of Bitcoin for the upcoming months. Despite the fact that prior halvings have been favourable to investors, the key concern is whether demand would be adversely affected.

It is difficult to make planning for the comet in the current environment of the current health and economic crises, and this makes sense. Keep a lookout for future events in your area. They are almost certainly going to be remembered as watershed moments in the history of Bitcoin.