Halving will take place within hours of publication of this article. It will only be the third time that this event has occurred in the few more than 10 years of Bitcoin's existence. Let's see what it is and why it is so important.
As we saw earlier, an incentive mechanism was created to align the needs of the network with the financial interests of those who support it. These incentives are paid in the form of coins created each time a new block is published as a reward for the processing power dedicated to discovering the correct value to be able to publish a block.
Halving, which in English means "halved", is what is called the reduction of the reward attributed to miners who manage to publish the block first. And that's exactly what happens: a halving of the number of coins received as a reward for the work done.
This event has already happened three times. At the beginning of the network, the reward was set at 50 coins per block. In the first halving, in 2012, it was reduced to 25. In 2016, it was reduced to 12.5. In 2020, cut to 6.25. In total, this event will happen 32 times, the last of which is expected to happen in the year 2140. From then on the reward will be reduced to 0 bitcoins.
Why is Halving so important?
In fact, for Bitcoin users it will not bring big immediate differences. Everything on the network continues to proceed in the same way as before, all currencies remain in the same place and all transactions continue to be kept in the same way.
The importance of this moment can be considered in two ways:
- its influence on the balance between supply and demand for bitcoins;
- monetary policy well defined and unalterable.
The most immediate effect can be reflected in the value of each bitcoin. A halving of the issuance of money means a sharp reduction in the rate of money creation, hence a decrease in supply. Assuming that demand will not decrease so sharply and so quickly this event should lead to an increase in the price of Bitcoin.
The search for easy money and knowledge of this theory has led to an increase in the demand for Bitcoin, causing the price to rise and attracting more greedy looks. Which, in fact, helps to fulfill this snowball effect that raises the price of Bitcoin. And, in fact, this has been the case in recent years. After each of these moments the value of a bitcoin in relation to fiat currencies (euro, dollar, pound ...) has grown significantly. Despite all the volatility that crypto have, if we consider the annual minimums in the price of Bitcoin we can see a clear upward trend in the price. Only one year did not increase.
Another issue that makes Halvings so important is that they are part of a constant and unchanging monetary policy. Designed by Satoshi Nakamoto, since the creation of the currency and which defined what currency creation would be like over time. Unlike fiat currencies which, being controlled by a central bank, can change the amount of currency in circulation as is convenient for the economy. In conjunction with the government, central banks may decide to withdraw money from the market or create and distribute money in the economy. At Bitcoin, this amount has a maximum ceiling of 21 million coins and the way they are put into circulation will never be different from what was defined at the beginning. For better or worse, the rules are defined from the beginning and cannot be changed.
One of the main characteristics of this policy is this cut in half of the reward for every 210,000 blocks, which means roughly 4 years considering the average of 10 minutes that a block takes to be published. Designed to attract miners at the beginning of the project with a greater reward. As Bitcoin gained popularity it would attract more people, the coins would be valued thus rewarding the initial miners for embracing the project from an early age.
Note that this event only influences the issuance of bitcoins. Each crypto has its monetary policy and although many have followed this model, the times when these events take place are different. Despite being exclusive to Bitcoin, the effect is felt across the community of crypto enthusiasts and investors attracting more people and their money into this world. Thus, throughout the “crypto-ecosystem” there are increases in the value of several crypto-assets. It is therefore important to emphasize that many of these assets are risky and require research and investigation before making any investment.