The Bitcoin halving is almost upon us, roughly 14 days away with a due date of May 12. The much covered event is highly anticipated, both from technical and a price point of views. The extensive coverage it has received is justified, as previous halvings have resulted in significant changes to the network in the months that have followed.
Even those with only a marginal interest in cryptocurrencies have heard of the halving, which goes to show the weight it carries in the development of the market. There are several things worth noting about the halving that are worth noting, however.
What is the Bitcoin Halving?
The core concept behind the halving is itself rather simple - the block rewards that miners receive for their part in keeping the network running. This happens roughly every 4 years.
Currently, miners receive 12.5 Bitcoins for mining blocks. When Bitcoin first launched, miners would receive about 50 Bitcoins for their work. Two halvings have followed - the first reducing the block rewards from 50 BTC to 25 BTC and the second from 25 BTC to 12.5 BTC.
The upcoming halving will reduce the block rewards to 6.25 BTC.
What is the Purpose of the Halving?
By reducing the block rewards, the supply of Bitcoin is reduced periodically i.e. Bitcoin is a deflationary currency - as opposed to fiat, which is inflationary. In other words, deflationary currencies increase their value over time (as the supply decreases) and inflationary currencies lose value over time. Just think about the price of groceries a few years ago and the price now - you’re paying more for the same product. Your purchasing power goes down over time with fiat.
The scarcity of an asset can determine its value, as is the case with gold. Gold is considered a store of value and hedge because it is a valuable commodity that is scarce.
Satoshi Nakamoto explicitly designed Bitcoin as a deflationary currency, avoiding the pitfalls of inflation.
What are the Consequences of the Halving?
Most people talk about the halving in terms of price potential. Historically, Bitcoin’s price has shot up after a halving. Previous halvings, which occurred in November 2012 and July 2016, have both seen an increase in price in the months that followed the halving.
But besides the price, there are other implications for mining. For one thing, miners will receive less Bitcoin for their work. This is in part why the price goes up; they put in roughly the same amount of work for less rewards. Some suggest that a decrease in mining profitability will see a reduction in the hashrate (this is the amount of computational power that solves Bitcoin’s mathematical problems).
However, there has been no long term change in mining contribution in the previous halving and there is no irrefutable reason to think it will happen now.
In all likeliness, while there will be changes on the side of miners, Bitcoin’s operation and momentum in the market will remain fundamentally the same. If any changes in price do occur, it will likely be because many are buying into the market before the anticipated date of the mining, which may push the price up.