Bitcoin is the most valuable cryptocurrency in circulation and it has maintained this status for a considerable time. One of the reasons that it has remained a very valuable asset is “bitcoin halving”. Bitcoin halving is a feature of the cryptocurrency that reduces the number of bitcoins in circulation by half. This in turn increases the demand for Bitcoin allowing it to maintain or even increase its price.
Bitcoin halving is one of the most critical events on the Bitcoin blockchain. Bitcoin uses blockchain technology which consists of nodes that keep a record of all bitcoin transactions. The blockchain nodes are responsible for verifying, approving, and rejecting any transaction on the Bitcoin network. To enhance the stability of the network, new nodes are added to the network once a transaction has been approved in a process called bitcoin mining.
Bitcoin mining enables people to participate in the Bitcoin blockchain network in processing transactions. Every miner must prove that they have participated in validating transactions and in turn, are rewarded with bitcoins. This reward is halved after every four years or after roughly 210,000 blocks of bitcoin have been mined.
Bitcoin halving explained
Bitcoin uses a proof of work mechanism to reward its validators or miners. In order to process a transaction, miners have to solve difficult mathematical problems and equations and upon completing this successfully, they will receive bitcoins. When a problem has been solved and its legitimacy confirmed, it is added to the network, creating a new node in the bitcoin network. Once a node or block is filled up, all the miners that participated in processing the transactions in that block are rewarded with bitcoins.
To prevent an over-circulation of bitcoins in the market, the reward issued to miners is periodically halved during bitcoin halving. This is bitcoin’s way of inducing price inflation of bitcoin allowing all the bitcoins in HODLing to be released. Bitcoin halving is very important especially now that bitcoin is approaching the end of its finite supply of 21 million bitcoins. Visit the Loop website to learn more about bitcoin halving.
Bitcoin halving implications
Every time a bitcoin block is filled up in the Bitcoin blockchain network, miners are rewarded with bitcoins which increases the number of bitcoins in circulation. In order to regulate the number of coins in supply and create a demand for bitcoins, halving must occur. Investors on the other hand can benefit from this halving as the price of bitcoin is pushed higher.
Every bitcoin halving event that has occurred in the past has been followed up with a massive bitcoin price surge. When the first bitcoin halving occurred in 2012, the price of bitcoin shot up from $12 to $1217. In 2017 after the second having that occurred in 2016, bitcoin was trading at $19,800 from $647. After the most recent halving that occurred in 2020, bitcoin traded at $64,507 from $8787 the price it was previously trading.
Bitcoin halving and its effects
Basically. when bitcoin halving occurs, the reward awarded to miners is reduced by half. This in turn creates an inflationary effect which reduces the supply of bitcoins. The reduced supply creates a demand for bitcoins which in turn pushes the price of Bitcoin up. Although the reward awarded to miners is reduced, the price increase helps breach the gap.
If bitcoin halving occurs and it does not create a price surge, it means miners will not benefit. It means miners will receive a smaller reward for validating transactions. Bitcoin compensates miners by reducing the complexity of mining tasks so that miners remain incentivized.
