Cryptocurrency Industry Basics: What is Halving? How does this affect cryptocurrency prices?
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Economy News - Baghdad
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Added 09/24/2023 - 9:26 AM
https://economy-news.net/content.php?id=36567
Reports
Economy News - Baghdad
Halving, which occurs periodically in some cryptocurrency networks, especially Bitcoin, is one of the most important events in the functioning of the blockchain network. Cryptocurrency investors are closely following this event, which directly affects people and organizations carrying out IT activities, who are called cryptocurrency miners.
Halving means halving the mining reward in blockchain networks that operate according to the proof-of-work consensus mechanism. This event, which virtually reduces the supply of cryptocurrencies, increases the price upward trend due to increased demand.
Bitcoin is the first blockchain network to implement halving as the first cryptocurrency. When Bitcoin was released in 2009 by its still-obscure developer, Satoshi Nakamoto, the mining reward was 50 bitcoins. With the halving, which occurs every 4 years, the block reward was reduced to 25 BTC in 2012, 12.5 BTC in 2016, and 6.25 BTC in 2020. While miners currently earn 6.25 BTC for each block they mine , this amount will decrease. To 3,125 BTC with the fourth reward halved which will be performed on the Bitcoin network in 2024.
According to the Bitcoin network software, the reward halving will end with the thirty-second halving in the year 2140. As a limited-supply asset, Bitcoin is set up as a blockchain network where the reward is halved every 210,000 blocks produced. Since the Bitcoin supply is set to a maximum of 21 million Bitcoins, when this amount is reached, Bitcoin production will end and miners will not receive block rewards. Instead, miners will only be able to earn transaction fees by validating transactions made on existing blocks. Currently, 19.42 million Bitcoins have been mined (about 92.5% of the total supply).
Why is the Bitcoin halving important? What is the impact on price?
Halving forms the basis of the token economy on the Bitcoin network. In this way, the supply of Bitcoin is controlled and provides a significant advantage over the unlimited money supply of fiat currencies.
In addition, the fact that supply is limited to 21 million is an important factor in the scarcity of the asset. The halving mechanism, encoded in Bitcoin's software, occurs automatically due to the decentralized nature of the blockchain network. The three halving events that have occurred so far have had a significant impact on the price of Bitcoin. However, experts share the opinion that the positive impact of the Bitcoin halving may decrease over the years. So much so that since the amount of rewards that miners will receive will decrease over the years, there are opinions that some miners having to withdraw from the market may have a negative impact on the price of the cryptocurrency.
However, others reject this view, rely on the long-term upward trend in the price of Bitcoin, and argue that miners who receive Bitcoin will receive satisfactory amounts in dollars. In addition, when mining activities in the Bitcoin network decrease, the opinion that the balance will automatically continue to be created in this area is gaining momentum, as miners who continue to work due to the decrease in difficulty can continue their transactions at a lower cost.
On the other hand, the positive impact of the halving on the cryptocurrency price depends largely on speculative movements. In theory, when demand for a commodity remains constant or increases, a decrease in supply pushes its price to rise. However, at this point, considering other factors influencing demand for crypto assets, it would be wrong to say that halving the reward will definitely lead to a price increase.
Historical data so far has shown that prices rose after the halving event. However, the upward price trend occurred at different times during the relevant periods. Therefore, in volatile markets, it would not be right to expect the cryptocurrency price to rise quickly after the halving.
Historical moments of Bitcoin halving
The Bitcoin network has seen 3 halvings so far. The first halving event began in 2012 and the fourth halving event will occur in 2024.
The first halving of Bitcoin occurred in 2012
The halving of the first reward on the Bitcoin network was very important in testing the economy of the Bitcoin token. This event has raised questions about how it will affect Bitcoin's growth.
With the halving on November 28, 2012, the block reward decreased from 50 BTC to 25 BTC. Bitcoin's price skyrocketed from $12 to $1,030 per year after the halving, an increase of nearly 8,500%.
When the dates showed 2016, the second half event was awaited with the same curiosity. Four years later, Bitcoin adoption has increased even more. During this period when the popularity of cryptocurrencies began to increase, the second reward halving occurred on July 9. This time, unlike the first event, there were short-term price increases before the halving.
After the mining reward dropped to 12.5 BTC, Bitcoin traded at $650, and the decline continued for a few more weeks after the halving. About a year and a half after the second halving, Bitcoin hit an all-time high of $20,000 at the time.
In 2020, when the third halving occurred, the Covid-19 crisis dealt a heavy blow to the entire global economy. Bitcoin was trading at less than $10,000 at the time. At the end of the 1.5-year period after the halving, Bitcoin set its historical peak at $69,000 in November 2021.
While the next halving is expected to occur in 2024, the block rewards will drop to 3,125 BTC at block 840,000.
Which cryptocurrency networks other than Bitcoin have a halving mechanism?
While halving activity is observed among cryptocurrencies that are provided via the mining method using a proof-of-work consensus mechanism, some cryptocurrency developers can control the supply in different ways such as forking instead of halving by changing the code.
On the other hand, Litecoin is the most popular altcoin that has a halving mechanism alongside Bitcoin. After the Litecoin reward halving, which is scheduled to take place in August 2023, the reward amount, which currently stands at 12.5 LTC, will decrease to 6.25 LTC.
Among other cryptocurrencies that will be halving on its network, the reward halving event for Bitcoin Cash and Bitcoin SV, which are fork assets of Bitcoin, will also happen in 2024. Currently, the expected reward halving dates for these cryptocurrencies are as follows:
Other cryptocurrencies that have halved among cryptocurrencies with high market caps include assets such as Monero, Zcash, Dash, and Raven.
As a result, halving is a major factor driving investors to show interest in cryptocurrencies that use this mechanism, especially Bitcoin. The reason for this is that, unlike fiat currencies which have an unlimited supply mechanism and are subject to inflationary pressures, cryptocurrencies like Bitcoin have a limited supply and have a deflationary structure due to halvings.
In addition, due to the limited supply of cryptocurrencies, investors tend to hold Bitcoin assets for the long term with a speculative approach, reducing the tendency to spend the asset as currency. This weakens Bitcoin's advantage as a currency and highlights its property as an investment tool as a commodity.
Source: investing
Views 34
Added 09/24/2023 - 9:26 AM
https://economy-news.net/content.php?id=36567
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