What is 'The Halving'? Explaining The Most Important Event In Bitcoin's History
The April 2024 halving, deemed the most significant to date, will reduce the block reward from 6.25 bitcoins to 3.125.
Here we will cover the basics of how the Bitcoin halving works, what the Bitcoin halving is, why it happens, and what it may mean for markets this year and beyond.
Understanding the Bitcoin Halving
Before looking at the potential impacts of the 2024 halving, let’s discuss how the Bitcoin halving works.
Bitcoin operates on a deflationary model, where the reward for mining new blocks is halved every 210,000 blocks, or approximately every four years, a process known as the "halving." This event is significant because it reduces the rate at which new bitcoin are generated, thereby limiting supply. Bitcoin is the only asset in human history to have a fixed supply that never increases, making it the hardest currency ever known.
This aspect of the protocol cannot be changed due to the decentralized distribution of nodes. For the supply limit of Bitcoin to be increased, the majority of nodes would have to agree to such a change. While this might be possibly in theory, it’s hard to imagine a scenario where it becomes reality. Thousands of independent node operators around the world would have to agree to making themselves poorer and reducing the value of Bitcoin as a whole.
The 2024 halving will slash the block reward from 6.25 bitcoin to 3.125 bitcoin. Historically, each halving event has been followed by a notable increase in bitcoin's price, although past performance is no guarantee of future results. However, the anticipation alone can lead to increased trading volume and price volatility, as we’ve seen in recent weeks.
Contrary to what some market commentators may say, the halving can never be truly priced in before it happens. That’s because much of the selling pressure in the market comes from miners, who must sell coins to cover their operating expenses. After the halving, this selling pressure gets reduced by 50%, as the miner revenue declines by the same amount
.What Happens to Miners after the Bitcoin Halving?
Miners can struggle after the halving, as they see a significant reduction in revenue. Larger, public mining companies can have a lifeline by accessing capital markets for further investment. In the absence of a swift increase in the Bitcoin price, some smaller miners may be forced to shut down.
As a result, the network’s hash rate tends to come down for a time after the halving. This then leads to a difficulty adjustment downwards, which can eventually make it possible for more miners to come back online
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The Impact of the Bitcoin Halving
This year’s halving may be the most important halving event in Bitcoin’s history. There are several converging factors that haven’t been present during previous halving cycles. Some of these include:
The emergence of spot Bitcoin ETFs;
increased regulatory clarity surrounding Bitcoin, cryptocurrencies, and exchanges;
a washout of many bad actors from the previous cycle (think FTX, Celsius, Voyager, etc.);
potential nation-state adoption of bitcoin (El Salvador and rumors of other, larger countries);
and, corporate adoption of bitcoin (Microstrategy, other public Bitcoin companies).
In the past, the halving has been a significant event for both Bitcoin’s price and the industry as a whole, even in the absence of the above variables. It stands to reason that this time around could be astronomical given the compounding effect of these new developments.
In addition, because retail investors can now gain exposure to bitcoin through ETFs, there could be ripple effects throughout the entire financial system. How this might take shape is anyone’s guess
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