Anyone who also has a passing interest in mining or cryptocurrency trading has probably heard of the phrase “Bitcoin has halved”. Still, do you understand exactly what this means and the effects it has on the Bitcoin market and cryptocurrency trading in general? This is a completely different story, which we will try to explain in more detail through this article.
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BASICS OF BITCOIN
To better understand the continuing nature of Bitcoin prices, the growing difficulties in their mining, and the rationale for the BTC halving events, we must first understand the underlying systems that drive the cryptocurrency market.
As you probably know, the key factor that distinguishes Bitcoin and other digital currencies from traditional money is that they have no physical elements. They exist purely in the digital world and use a complex peer-to-peer system to check.
What does this mean, however, in practice? Well, Bitcoin’s system relies on a technology known as blockchain, which is a growing list of records. These records are known as blocks and are linked using advanced cryptography. If we lost you there and you’re wondering what all this has to do with halving Bitcoin, don’t worry – we’ll get to that.
For now, it is important to understand that it cannot be mixed into the system because each block contains the cryptographic scatter of the previous block, including the timestamp and all previous transaction data. This means that the system is practically faulty. This is because once a transaction is logged, the data of any selected block cannot be changed without changing the other blocks. All of these blocks are publicly visible to anyone who has ever participated in the transaction, making it even more difficult to change any block.
BITCOIN CREATION, MINING AND TRADING
The key to understanding the events of halving Bitcoin lies in understanding the connection between the creation of Bitcoin and its proliferation. Although the authorities mint or print conventional currencies, Bitcoin and similar cryptocurrencies must first be created in the system or “mined”. This is a self-sustaining system because bitcoin miners are rewarded for providing the computing power needed to encode and decode the blockchain during the process of creating new blocks that are added during each blockchain transaction.
The very act of trading Bitcoin is therefore inherently linked to Bitcoin mining, which is itself designed to provide ever smaller returns. The halving of bitcoin is a direct consequence of system design: there is a finite number of bitcoins that need to be mined, and almost 90% of that total fund has already been created.
As each new transaction is made, adding new randomized blocks to the chain becomes an increasingly complicated process, and Bitcoin mining brings less and less returns. While once one mining equipment could generate dozens or even hundreds of Bitcoins in a short period of time, today entire mining farms can at best hope to be awarded several BTCs to process power in months dedicated to encrypting and decrypting blockchains. .
WHAT IS BITCOIN HALVING?
Okay, plenty of downtime: now that we’ve given you a basic overview of the system, it’s time to explain the actual halving process. The total maximum offer of BTC is 21 million, of which more than 18 million Bitcoins have already been mined. The process of creating and spreading new Bitcoins is designed to continue at an ever-decreasing rate until 2140, at which point miners will continue to expand the system by rewarding transaction fees paid by network users.
The halving of Bitcoin in 2020 is just one link in a chain that is part of a synthetic inflation system. This halving system is designed to halve the rewards for bitcoin mining approximately every four years until all available bitcoins are mined. In practice, this means that every four years the returns for Bitcoin mining are reduced and the creation of new Bitcoins becomes twice as difficult.
This in turn causes a shortage in the market, which usually increases the price of Bitcoin. This is the essence of the halving process – as the market becomes increasingly saturated with Bitcoin, creating new ones becomes increasingly difficult. A halving event occurs on every 210,000 excavated blocks.
WHEN DOES THAT HAPPEN?
As you can imagine, predicting the date of halving Bitcoin is not an exact science, so it is almost impossible to determine the exact time when the next one will happen. So far, the event has followed a fairly stable schedule of one halved cycle approximately every four years, but despite the fact that many websites like CoinMarketCap have very accurate metrics to track currently mined blocks, their predictions are tentative at best. These forecasts simply give people a rough idea of when they can expect the next big shocks on
BITCOIN NETWORK.
It is also worth remembering that the Bitcoin halving clock only gives us a prediction regarding the date of the next halving event. The market price of bitcoin today is affected by many more external economic factors, and among them is the COVID-19 pandemic, whose effects on traditional and digital currency have yet to be fully revealed.
WHAT ARE ITS EFFECTS?
Certainly the most interesting aspect of the whole process of halving predictions is how this event will affect the price of Bitcoin, the market and the crypto mining scene in general. Looking at the historical chart of halving Bitcoin, the first event in 2012 knocked down mining awards from an incredible 50 Bitcoins per mined block to 25, while the next in 2016 reduced it to 12.5. As of May 11, 2020, the number is hovering at 6.25 and will remain there probably until sometime in 2024.
They are not the only aspect to consider, but these halving events in the past have proven crucial in determining the value of Bitcoin transactions and, conversely, increasing the price of cryptocurrency. Ignoring other factors for a moment, Bitcoin inflation can be directly linked to the process of halving: as Bitcoin becomes harder to create, the market value of the cryptocurrency grows.
The primary reason for this is that each halving increases the ratio of Bitcoin stocks and flows, which means the ratio of stocks currently available in circulation to newly introduced stocks. The first halving saw Bitcoin rise from about 12 to almost $ 1,150 in just one year.
This was then continuously reduced to “only” around $ 650 at the time of Bitcoin’s next halving in 2016, to jump to a record $ 20,000 by the end of 2017. Due to several internal and external factors, this price fell to a low of $ 3,200 at one point, but in the short period since halving in May 2020, it managed to break even the previous 2017 record, soaring well above $ 20,000 .
GLOBAL ECONOMIC CONSIDERATIONS
We said earlier that we will ignore external factors, but let’s go back for a moment. Gold and other precious materials have always been highly valued for their scarcity and their ability to be used as a stock of value. On the other hand, since the gold standard was abandoned, the amount of US dollars and other physical currencies in circulation has been constantly increasing.
Since the most recent date of halving Bitcoin and, more importantly, the outbreak of COVID-19, the total money supply of US dollars has gone from about 4 trillion to more than 6.5 trillion. In practice, this means that the actual purchasing power and confidence that people want to show in the currency is rapidly declining. And that without even taking into account the fears of counterfeiting, which are legitimate when it comes to any fiat currency.
Compare that to Bitcoin and similar digital currencies: not only does it deal with a solid platform that is self-sustaining and powered by P2P, but gives users a clear indication of the total number of assets available and how to predict and manage its inflation rates.
All of these factors, combined with the growing distrust that people around the world have of their banks and governments, explain the global popularity of Bitcoin and the importance that the process of halving Bitcoin will have on the world economy in the future. We hope this article has managed to shed light on the process and help you better understand why and how it will affect the global economy in the years to come.