If you are someone who is somewhat familiar with cryptocurrencies, chances are you have been hearing increasingly more about this thing called the "Bitcoin halving." That is because it is the most anticipated event in the crypto realm and is speculated to be the main driving force of the current bull run.
In this article, we'll dive into some of the fundamentals of how Bitcoin works and answer essential questions about the upcoming halving: What exactly is it? When is it happening? And perhaps most importantly, why should you, as an investor, pay attention to it?
To properly grasp the significance of the upcoming Bitcoin halving, it is ideal to have a proper understanding of how the Bitcoin network operates.
The Bitcoin network runs on a decentralized blockchain system, meaning no central authority controls it. Instead, the network relies on a distributed ledger called the blockchain, maintained by thousands of independent computers worldwide. These computers, referred to as miners, collectively attempt to validate and record transactions on the blockchain by solving mathematical puzzles.
For the time spent and energy used to verify the transactions, miners are rewarded with newly created Bitcoins for each block they add to the blockchain. Miners also earn transaction fees from users, encouraging their involvement in the network and contribution to its security through computational power.
One appealing feature of Bitcoin's design is its capped supply of 21 million coins, with over 19 million already in circulation, guaranteeing scarcity. Also, unlike traditional fiat currencies printed to oblivion by central banks, Bitcoin actually has a deflationary feature known as halvings.
The quantity of Bitcoin created and distributed to miners per block mined is halved every 210,000 blocks added to the blockchain, or roughly every four years. This halving process will continue until all 21 million coins have been mined, which is expected to be around the year 2140.
The block rewards were first halved in 2012, when they were reduced from 50 to 25, then again in 2016 to 12.5 and most recently to 6.25 in 2020. Nearly four years later, we are approaching another halving event projected for April 17th, where the block rewards will be cut to 3.125 BTC.
Miners face substantial challenges when a Bitcoin halving event occurs as their primary income source from block rewards diminishes. This reduction often translates to decreased profitability, especially when factoring in the expenses associated with electricity and hardware essential for mining operations. Consequently, some miners may be compelled to halt their mining activities if the price of Bitcoin fails to rise sufficiently to offset the reduced rewards, potentially resulting in a decline in the overall processing power of the network. Inefficient mining operations, particularly those constrained by expensive electricity contracts or lacking access to cost-effective hardware, may struggle to maintain viability under these circumstances.
The upcoming fourth halving puts more pressure on miners, showing the importance of planning and efficiency in Bitcoin mining. Miners must adjust their strategies to stay profitable with fewer block rewards, stressing the need for careful financial management and investing in better mining equipment.
Historically, Bitcoin halving events have been catalysts for substantial price surges, often leading to new all-time highs within a year of the halving date. This is typically attributed to the decrease in newly minted coins, declining selling pressure from miners, and either increasing or steady demand. However, it is important to note that several other economic factors affect the crypto markets besides just halvings.
In November 2012, after the first halving, Bitcoin's price rose from $12 to a peak of $1,152 within a year. The second halving in July 2016 saw the price climb from $664 to an impressive peak of $17,760 within the following year. Similarly, the third halving in May 2020, starting at $9,734, led to a peak of $67,549 within the next year.
It's clear to see that the price performance throughout the past halvings has followed similar patterns. This pattern typically involves a bull market lasting at least one year after the halving, followed by a strong correction, and then transitioning into a consolidation phase leading up to the next halving event.
While it's impossible to predict exactly what will occur this time around, many anticipate that the price will mirror past halving patterns. As seen previously, the price multiples from bull markets have been diminishing with each halving event. Given Bitcoin's current $1.2 trillion market cap, expecting a 1000% price surge by 2025 seems unrealistic. However, a 100% increase to a price exceeding $100,000 per Bitcoin is well within the realm of possibility.
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