In the next 24 hours, the Bitcoin inflation rate will be reduced through another "halving" event. This event, which occurs every four years, is a central pillar of Bitcoin's monetary policy. But what exactly is Bitcoin halving, and how does it impact the price of digital gold?
Bitcoin represents a groundbreaking development in the financial world and is the first successful implementation of a decentralized digital currency. The distributed payment system allows for secure and direct transfer of digital money without the need for a third party. As part of this vision of an independent network, Bitcoin's monetary policy is programmatically defined. The inflation of "digital gold" decreases every four years and will stop around the year 2140 when the maximum supply of 21 million Bitcoins is reached. Therefore, Bitcoin halving is essential to perceive Bitcoin as an alternative monetary system.
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What is the Bitcoin Halving?
Currently, there are approximately 19.4 million Bitcoins in circulation. Newly created Bitcoins are rewarded to miners who contribute computing power to secure the blockchain system. This block reward is halved every four years, known as "halving." As a result, the number of newly created Bitcoins decreases exponentially until the theoretical maximum of 21 million Bitcoins is reached. With an average block time of 10 minutes, this number is expected to be reached around the year 2140. The next Bitcoin halving is projected to take place in the next 24 hours.
We are now approaching the fourth halving in Bitcoin's history, and we can look back on a comprehensive history. Initially, the mining reward was 50 BTC per block. In November 2012, it reduced to 25 BTC, and in July 2016, it further decreased to 12.5 BTC. Since May 11, the reward has been 6.25 BTC for each newly mined block, soon to be reduced to 3.125 BTC.
What are the effects of halving on the Bitcoin price?
Bitcoin was designed as a limited digital asset. Similar to commodities like silver or gold, its price is influenced by the dynamics of supply and demand. Through halving, the number of newly issued Bitcoins is reduced every four years, making the supply scarcer and decreasing the inflation rate. Currently, around 900 new Bitcoins, worth $60 million, are created and distributed to miners daily. Miners usually sell a significant portion of these rewards to finance their operations. With the upcoming halving, this newly created supply will be halved, theoretically resulting in only $30 million worth of Bitcoins entering the market daily.
In the past, halving cycles have established recurring price patterns for Bitcoin. Market participants often price in the effective reduction in inflation months in advance, and this impending momentum has historically propelled Bitcoin into a prolonged bull market. Ultimately, the fundamental changes in Bitcoin's supply are real and play a crucial role in defining Bitcoin as a scarce digital asset. In crypto circles, there is often talk of four-year cycles characterized by rapid price increases and decreases over two-year periods.
Interestingly, the Bitcoin price recently broke through its all-time high before the halving for the first time in its history. The newly approved spot Bitcoin ETFs were partly responsible for this. Since their approval in mid-January, these products have recorded net inflows of over USD 12 billion. On average, this added USD 180 million in buying pressure on Bitcoin. This already accounts for more than the daily mining rewards. After the halving, this dynamic could accelerate.
Impact of the Bitcoin Halving on the mining industry
Bitcoin mining requires a considerable amount of energy for both computational tasks and cooling the involved computers. As a result, the mining industry tends to favor locations with cheaper electricity. The costs of Bitcoin mining also depend on expenses related to equipment, electricity, and the facilities housing the hardware. When miners' rewards are halved, the Bitcoin price must double to achieve similar profitability as before halving. Despite the last two halvings and setbacks in China, the total computing power available to the network continues to steadily increase and is at an all-time high.
The mining industry is in constant competition, which is undoubtedly intensified by halving. In comparison to the last halving in May 2020, some significant observations can be made: there are more significant players in the mining sector, more efficient mining equipment, and stronger competition than ever before. While a majority of mining activities took place in China until a few years ago, the United States now leads globally. Canada, Kazakhstan, and Russia are also significant players. Following the halving of Bitcoin inflation, some miners may temporarily shut down their machines due to reduced profitability. However, if the Bitcoin price rises in the future, more miners are likely to reenter the market.
