What is Bitcoin halving? How does it affect the cryptocurrency?

The Bitcoin halving is a major event. Since its inception, Bitcoin has been marked by several innovative and even unique features. Its success as a currency and digital asset is largely due to these features. And for many people, the biggest and most determining factor in the success of the cryptocurrency is the so-called Bitcoin Halving.

Whether it is the biggest or not is up for debate. However, it is undeniable that Bitcoin’s halving is what makes it scarce and regulates its issuance. As a result, it presents a real scarcity and controlled “inflation,” something that no digital asset – and very few in the real world – have achieved.

Therefore, in this text we will learn and understand better what this process is. To make the topic clearer, we will always talk about inflation to designate the issuance of new Bitcoins. And the term “cut in the issuance of new Bitcoins” will also be used when referring to the halving.

Bitcoin Mining

When Satoshi Nakamoto created Bitcoin, he set a maximum number of Bitcoins that would ever exist: 21 million. However, these Bitcoins were not all created at once. Instead, they would be issued in specific quantities and at specific times. This process was called Bitcoin mining.

On January 3, 2009, the first Bitcoin block was created, called genesis block. There were 50 Bitcoins in this block, and every 10 minutes, new blocks like these were added to the Bitcoin network. Each block added 50 new Bitcoins to the market, which were then claimed by users who were mining.

However, the blocks would not issue 50 Bitcoins forever. And it was precisely to regulate this issuance that Satoshi included a rather ingenious mechanism. He ensures that the new amount of Bitcoins issued is always cut by the network. And this cut is of fundamental importance for the blockchain and Bitcoin as a whole.

The Halving

The word halving comes from English and means something like “cut in half.” It is the name given to a process of cutting the issuance of new Bitcoins. The halving process is written into the Bitcoin code and is scheduled to happen every specific period of time.

These halvings reduce the issuance of new Bitcoins per mined block. It is always cut by 50% after a new halving, and the process occurs every 210,000 blocks (about 4 years). In Bitcoin, most processes occur by block count, so there is no precise time estimate.

As we saw above, issuance started with 50 Bitcoins in 2009. In 2012, it dropped to 25 BTC, falling to 12.5 BTC in 2016. The last halving, in May 2020, cut issuance to 6.25 BTC, a rate that will remain until the next halving.

The halving process brings to Bitcoin a feature that no other currency has: predictability in its inflation rate. No one can say what the inflation rate of the dollar or the real will be in one, two or even ten years. On the other hand, the rate of issuance of new Bitcoins is fully known to everyone.

It is possible to know what the Bitcoin “inflation” rate will be in 2020 or 2062. The halving process also limits the amount of new Bitcoins in the economy, which makes the crypto asset even scarcer. This, combined with its absolute scarcity and other factors, makes Bitcoin extremely valuable and desired. In short, the halving is:

• Deflationary: it is through halving that Bitcoin maintains a healthy proportion between supply and demand;
• Temporal: the halving occurs approximately every four years;
• Impactful: The halving could impact the price of Bitcoin, either positively or negatively. However, there is no certainty about the influence it has;
• Part of Bitcoin: The halving is part of the fundamentals of Bitcoin. There will never be a change in the event, where the event ceases to exist and the mining rewards of the Bitcoin network are changed.

Bitcoin Price

Halvings tend to have a strong impact on the price of Bitcoin. The process makes the cryptocurrency more scarce in terms of new Bitcoins. However, the demand for Bitcoin continues to grow. This tends to increase the value of Bitcoin. This is why the cryptocurrency tends to experience large price explosions after halvings.

Economic theory explains that if there is a reduction in the supply of an asset and demand remains, there will be upward pressure on its price. The halving causes the supply of new Bitcoins to decrease while consumers — and investors — continue to demand high prices. Therefore, most analysts believe that Bitcoin will appreciate, but opinions differ on the magnitude and speed of these gains.

In the last two halvings, Bitcoin’s appreciation occurred exponentially at least one year later. The 2012 halving took Bitcoin above $1,000 for the first time in 2013. The halving preceded a rapid and even more intense appreciation in 2017. Bitcoin surpassed $10,000 for the first time and reached its all-time high to date, reaching almost $20,000 by the end of that year.

At this point, Bitcoin is beginning an expansion cycle right after another halving. This cycle could soon consolidate with a new all-time high. The fact is that with each halving, Bitcoin becomes scarcer. This mechanism brings predictability to the system, allowing investors to know Bitcoin’s “inflation rate” in advance.

Bitcoin Prediction

However, this process does not happen smoothly. As history has shown us, it is normal for there to be great volatility in the market before and after the halving. In many cases, the price can suffer sharp drops during this period. But history also shows that, in general terms, this event takes Bitcoin to a new price level..

“Every Bitcoin halving, the scarcity rate doubles and the market value increases tenfold, this is a constant factor.”, says analyst Plan B.

The price models created by the analyst have been quite accurate. Likewise, Bitcoin’s performance in the first two halvings brings good signs. Still, they are just signs.

As Swedish scientist Niels Bohr said, “making predictions is very difficult, especially about the future.” There is no way to be certain about which direction Bitcoin will take, much less at what values. It is worth noting that the halving phenomenon, as well as its effect on the price of Bitcoin, is something very new.

What we do know is that the cryptocurrency will remain scarce and with a fairly predictable halving policy. We don’t know whether the price of Bitcoin will remain the same, go up or down. You can rely on one of the narratives or you can use recent history. In all cases, the data may not make a good Bitcoin prediction, but it does indicate good reasons for optimism. Therefore, it is important to:

• Be careful around halvings: considering that halvings impact the price of BTC, it is important to be careful with trade operations close to this event;
• Don’t create expectations about appreciation: although Bitcoin appreciated during the 2012 and 2016 halvings, there is no guarantee that the same will continue to happen. As the market changes, it is normal for the upward and downward movements to also change;
• Do your research: This is about not creating expectations. It is important to look at arguments for and against valuations;
• Beware of scams: around the halving, scammers send emails and even text messages pretending to be from reliable platforms. Always check the information.

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