What is a Bitcoin halving and what does it mean for the cryptocurrency community? | to explain

Just as the sports world eagerly awaits the Olympic Games every four years, those who follow cryptocurrencies look forward to an event of their own that takes place every four years. As athletes train for the 2024 Games in Paris this summer, cryptocurrency traders and Bitcoin miners are preparing for what is known as the “Bitcoin halving” – expected to happen in April.

What is Bitcoin halving?

Bitcoin halving refers to a 50% reduction in the reward paid to Bitcoin miners who successfully process other people's cryptocurrency transactions so that they can be added to the public digital ledger known as the blockchain.

In order to “grow” the Bitcoin blockchain and keep the ecosystem running, Bitcoin miners rely on advanced computer equipment to solve a complex mathematical puzzle through a process known as “proof of work.” This intense activity is why Bitcoin transactions result in huge carbon footprints and require a huge amount of electricity. No real mining is performed.

Bitcoin miners with sophisticated computer equipment, operating on an industrial scale, are likely to solve the puzzle first and claim their prize, which is currently set at 6.25 Bitcoin (BTC). While the reward amount is determined, the true value of this reward fluctuates based on Bitcoin market prices and when the owner chooses to sell.

(To get the top tech news of the day, sign up for our Today's Cache tech newsletter)

Is there an easier explanation?

Think of a group of cashiers in a grocery store competing for each bill with the same set of items, with the person who does it first (and accurately) receiving a prize of ten gold coins at the end.

Cashiers can use their favorite tools to bill items and process payment. While one person may prefer to calculate the total with paper and pencil, another may decide to use the calculator on their smartphone, while another person purchases a sophisticated computer system connected to a price scanner. The person who is most likely to win in this case is the cashier who has the latest equipment, but others have a chance to win as well. This is a positive system for pretty much everyone: customers' items are billed efficiently and all the cashiers do their job well because they want to claim the prize.

Four years or so later, she returns to the grocery store where the cashiers are still running this contest, but the prize money has been reduced to five gold coins. Is the reward still worth the effort? This depends on the price of gold in the market, and the cost of the equipment that the money changers purchased in order to win gold coins.

This is one way to understand the Bitcoin halving price.

Why is the Bitcoin halving important for cryptocurrency investors?

Bitcoin mining increases the supply of Bitcoin in circulation while the Bitcoin halving reduces the rate at which these currencies are issued, making the asset scarcer. Scarcity is seen to lead to higher prices, as is the case with gold.

While there can only be 21 million Bitcoins in the world, more than 19 million have already been “mined” or issued. This seems like the end of the story, but the Bitcoin halving means that it will take much longer to mine the remaining coins. The halving occurs after 2,10,000 blocks have been mined, and has so far occurred in 2012, 2016 and 2020 – every four years.

In 2009, a successful Bitcoin miner managed to get a prize of 50 Bitcoins. After the halving this year, they will receive only 3,125 bitcoins. However, keep in mind that Bitcoin prices are much higher now than they were in 2009, so this does not necessarily represent a loss for the miner.

As of February 14, the price of 1 Bitcoin was approximately $49,528. This means that the mining reward on February 14 will be around $3,09,550 (6.25 x the price of 1 Bitcoin). Whether this value will rise or fall after the Bitcoin halving depends on the price of Bitcoin.

Corporate and independent Bitcoin miners are spread across the world, trying to take advantage of cheap electricity prices in countries like Kazakhstan and Iran to extract as much Bitcoin as possible. China was originally home to many of the world's cryptocurrency miners, but government crackdowns have led to a mass exodus to other countries.

What is the impact of the Bitcoin halving on investors?

This depends on the investor in question, how involved they are in Bitcoin and its ecosystem.

For example, a corporate-level miner who has exhausted his wallet paying for Bitcoin mining hardware (and the electricity bills that come from running it) is likely desperate to earn his block reward in these final days while it is still set at 6.25 BTC. Instead of the much lower 3.125 BTC.

On the other hand, a new trader who has invested a small amount of money in Bitcoin through a mobile app cryptocurrency exchange and knows nothing about the underlying blockchain technology may not even react to the halving news.

Meanwhile, a more experienced trader who has looked at previous halvings may try to increase his investment in Bitcoin in hopes of profiting from a potential rise in prices, even though another trader may be “shorting Bitcoin” while hoping to profit from a potential price collapse. .

What will happen to the cryptocurrency market after the next Bitcoin halving?

The short answer: Almost no one knows.

The long answer: Countless cryptocurrency traders, financial analysts, fintech engineers, cryptocurrency influencers, and statisticians claim that they can predict the price path of Bitcoin with the help of cryptocurrency models and metrics, but investors should know that these are all just… Educated guesses. better.

Many Bitcoin investors and observers also point to a 4-year recurring cycle that hinges on the halving, or even claim that prices rise after the halving. But in reality, the currency's journey was unpredictable and difficult to chart.

Each halving in Bitcoin's history has been vastly different due to an eclectic mix of blockchain-related factors, increased regulation by regulators around the world, increased awareness around cryptocurrency investments, increased Bitcoin adoption, and various geopolitical events or economic shocks. Bitcoin is an asset whose price is largely driven by investor sentiment, with a “fear and greed” indicator to help investors understand how prices can change suddenly.

While the upcoming Bitcoin halving will be a fascinating episode to watch, cryptocurrency watchers would be better off relying on their own research and determining what the halving means to them personally.