[Imota Cryptopedia] What is Bitcoin Halving? FAQ about Bitcoin Halving

[Imota Cryptopedia] What is Bitcoin Halving? FAQ about Bitcoin Halving

4 minute read

When it comes to the main reason driving a new uptrend of the market, many people will mention Bitcoin Halving.
So what is Bitcoin Halving? Why is this an important event that can help you change your position? In this article, Imota will help you find out the answer!

What is Bitcoin Halving?

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Bitcoin halving is the process of halving the block reward of Bitcoin mining. It happens every 4 years, corresponding to every 210,000 blocks mined, until all 21 million Bitcoins are mined (expected in 2140).
A block on the Bitcoin network is a file that stores 1 MB worth of Bitcoin transactions. The halving event occurs not only for Bitcoin but also for many other POW coins, such as Litecoin, Zcash and BitcoinCash.

What is the purpose of Bitcoin Halving?

1) Slowing Inflation

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The main goal of the halving is to limit the rate of Bitcoin inflation by reducing the number of coins issued. The algorithms of cryptocurrencies like Bitcoin do not allow you to print an infinite amount of coins. Bitcoin supply is limited to 21,000,000 BTC.
Thanks to the Bitcoin halving, the growth rate of supply will be significantly lower than the growth rate of demand for them. Each time the halving occurs, the coin issuance rate decreases, which helps to balance the growth of the supply and prevent inflation.

2) Stimulating the growth of Bitcoin value

Bitcoin halving directly affects the growth of its value. Each halving reduces the flow of new coins into circulation, increasing the price of Bitcoin; supply decreases while demand continues to increase.
This phenomenon is a general economic law, not only operating in the cryptocurrency market. The price of bitcoin is expected to increase exponentially with each halving until it is fully mined.

3) Strengthen Decentralization

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The Bitcoin halving also enhances the decentralization of the network, as after each reduction in the number of rewards for a block mined in the network, miners have to work harder and more efficiently to get them. same amount of block reward as before.
Fun fact: The Bitcoin halving is expected to end in 2140, when the last coin out of a total of 21,000,000 coins will be mined.

How does the Bitcoin Halving process take place?

An overview of the Bitcoin Halving process is as follows:
Split reward in a half -> Reduce inflation -> Reduce supply -> Increase demand -> increase coin price -> The miner's reward value remains the same even though the reward ratio is low.
The entire process is an essential function of the Bitcoin protocol and can be found on the Bitcoin Core Github. This function stipulates that for every 210,000 blocks generated, the default reward for each new block will be halved.
In the entire operational network of the blockchain, rewards play an important role. The reward must be commensurate with the miners' efforts and especially large enough for them to perform the task, contributing to the protection of the system.
The more miners involved in the transaction validation process, the more resilient the system is to attack because hackers need an equal amount of resources to crash.
In essence, if the price and demand for Bitcoin are not high while the reward is decreasing, then miners will not have the incentive to maintain transaction validation. In the event that the coin price does not increase, Bitcoin establishes a protocol to reduce the difficulty of validating transactions. This means that the number of bitcoins issued as rewards is still smaller, but the transaction processing difficulty is reduced.

How many times has the Bitcoin Halving happened?

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In 2009, the miner's remuneration reached 50 BTC per block. On November 27, 2012, the first Bitcoin halving occurred — the number of coins dropped to 25 BTC.
On July 9, 2016, when the second Bitcoin halving event occurred, the mining reward was reduced to 12.5 coins.
Finally, on May 11, 2020, the third halving finally happened, with the reward halving again (to 6.25).
At the next Bitcoin halving, scheduled for March 31, 2024, the block reward will be 3,125 coins.
A total of 32 Bitcoin halvings are programmed in the network, and as soon as 21 million BTC are released, Bitcoin mining will be stopped immediately. This fateful event is expected to occur around the year 2140.

What is the impact of Bitcoin Halving on the crypto market?

For miners

After each Bitcoin Halving, the miner reward is halved, which not only automatically reduces the profitability of mining, but also increases the cost of electricity required to mine. As a result, it negatively affects the performance of individual miners compared to professionally invested miners.
On the other hand, Bitcoin Halving may cause miners to switch to POW altcoins such as ETC, LTC or BCH, instead of Bitcoin, due to their more attractive mining conditions. This will contribute to the growth in the capitalization of those altcoins.

For investors

Following the halving history, the connection between halving and the Bitcoin price can be seen after each block split:
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The first halving took place on November 28, 2012, Bitcoin price increased from $12 to $1,207 on November 28, 2013.
The second halving took place on July 9, 2016, when the Bitcoin price rose from $647 to a dizzying $18,972 on December 17, 2017.
Then, within a year, the Bitcoin price dropped from that peak to $3,716 on December 17, 2018, still about 575% higher than the pre-halving price.
The last halving, Bitcoin price at $8,821 on April 14, 2021, escalate, reaching $63,233 (up to 617%). After 1 month since the halving event on May 11, 2021, the price reached a record of $49.504, an increase of 461%.
Observation can reveal a common scenario, after each halving, Bitcoin price will spike, then plummet. The price after the drop is also higher than before the event.
For example, in 2017-2018, the Bitcoin bubble rose to $19,000 and then fell to $3,700 - this price is still higher than before the halving of $650.

Are there any risks associated with Bitcoin Halving?

While the halving has a positive impact on the Bitcoin network, it also brings certain negative consequences:

The reduction of the number of miners

As mentioned earlier, the main driving force behind mining is the reward received for each block mined. Halving the reward could make Bitcoin mining less profitable, leading to a decrease in the hash rate. This can make Bitcoin less secure, as there will be fewer miners to process transactions and secure the network.
The hypothesis to solve this problem is to use more powerful miners, or different algorithms to increase mining performance.

More centralization

By far, Bitcoin is considered the most decentralized digital currency, control is completely excluded from ordinary investors, companies, and government agencies.
However, the Bitcoin Halving could cause minor miners to leave the market. The unfortunate consequence is that the Bitcoin network may decrease in decentralization, since a significant portion of the mining power will be controlled by a few large pools, thereby creating a potential risk to the stability and security of the Bitcoin network. network security. Bitcoin will be more susceptible to manipulation and control.

What if the block rewards are too small?

Nakamoto himself wrote, implying that in the next few decades, as the rewards become less and less, transaction fees will become part of the payment for validating transactions.
Another direction given to keep the system working is to optimize transaction validation in the direction of helping miners get more rewards by quickly processing transactions.

What if there are no more Bitcoins to halve?

As mentioned in the article, in 2140, the supply of Bitcoin reaches the limit of 21 million, the halving will end. At that time, the reward for miners will be based entirely on transaction execution fees, and Bitcoin will then be like the nominal market like other currencies.

The End

Bitcoin halving is definitely an important event that takes place in the blockchain. It plays an essential role in ensuring a stable balance between supply and demand for Bitcoin. Serving as the primary mechanism for regulating the emissions of the first crypto asset, the halving helps to facilitate both equal competition between miners and profitable trading in the cryptocurrency market.
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