The Bitcoin halving has been a catalyst for every bull run we've seen in the history of crypto.
Knowing about the Bitcoin halving and its historical effect on the crypto market
gives us clues as to where we are in the current market cycle,
when the best time to invest is,
when to take profits
and where market prices might go from here.
My name is Ben.
And today I'm diving into the Bitcoin halving, what it is, what it does and how it affects price.
Let's get it!
The Bitcoin halving is an event where the reward for mining Bitcoin is cut in half.
The first Bitcoin was mined back in 2009.
The reward for solving a block was 50 BTC.
There have been three halving events since.
In 2012, the reward was halved to 25 BTC.
In 2016, the reward was cut to 12.5 Bitcoin per block.
The most recent Bitcoin halving took place on May 11, 2020,
where the reward was reduced to 6.25 Bitcoin.
To understand the halving, we first have to understand Bitcoin mining.
Mining for Bitcoin is when people use computing power
to process and validate transactions on the Bitcoin network.
It's the basis for network security.
Bitcoin is proof-of-work,
which means that miners are rewarded with Bitcoin
for the work, cost and equipment required to process transactions.
When computers are mining Bitcoin,
they solve mathematical problems and confirm transactions.
These transactions are then added to a block
which creates a chain of transactions.
This is what forms the backbone of a term we all know,
blockchain.
We don't know who Satoshi Nakamoto, the founder of Bitcoin, really is,
but we do know that this person or group of people program the halving into the Bitcoin blockchain,
regulate mining rewards and increase the asset scarcity over time.
These are complicated ideas first introduced by the Bitcoin network
and copied by many proof-of-work blockchains that have emerged since.
Nothing explains mining and Bitcoin better than the Bitcoin whitepaper itself,
which, by the way, is worth a read.
The whitepaper explains that block rewards are the reason that anyone would want to become a node,
as miners are called in the whitepaper, on the Bitcoin network.
And that reason is financial rewards.
Nodes help secure the network and put more coins into circulation.
The first transaction in a block is called the coinbase.
And this reward creates the incentive for nodes to support the network,
provides a way to initially distribute coins into circulation.
The document compares gold miners using resources to add more gold to circulation
to CPU time and electricity resources being used to get more Bitcoin into circulation.
Since Bitcoin mining became the profitable industry it is today,
GPUs, or graphic processor units, have replaced CPUs,
which now have been replaced again by specialized chips called ASICs,
which specialize in hash calculations.
The first Bitcoins were mined by Satoshi Nakamoto on January 3, 2009 using a personal computer.
Solving a puzzle is a brute force effort in which computational device
tries a computation over and over again until it finds the answer.
Over time, with increasing competition,
the difficulty of the algorithm increases in order to secure the network.
Using a PC wasn't powerful enough,
so GPUs, eventually ASICs, became the norm.
We'll get into hash rate difficulty a little later.
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The whitepaper goes on to explain that since the rewards will decrease over time,
starting at 50 Bitcoin per block, and halves every four years,
transaction fees are introduced as a secondary incentive to miners.
This makes sure that the miners we rely on to validate and secure the network
will have incentive to stay active on the network,
even once all 21 million Bitcoin have been mined.
This will occur sometime in the year 2140.
Incentivizing miners to continue validating the network indefinitely
hinges on the value of Bitcoin going up over time,
which is the trend we've seen for Bitcoin so far.
The first Bitcoin was traded in July 2010.
The price of one BTC was 0.08¢.
The price has gone parabolic since then,
reaching an all-time high this past November of $69,044.
If upward price trends continue over time,
validating the network for transaction fees will still be profitable,
even if the transaction fee average stays the same as it is now,
which is about 0.15 BTC per block.
The halving was built into the network to increase scarcity,
and it also creates secondary benefit that increases the price of Bitcoin.
Halving the mining rewards creates new buzz for the asset
and causes investors to get excited about investing in Bitcoin again.
The months after each halving are usually followed by bull runs,
where we see the price of Bitcoin and the broader crypto market increase dramatically.
Reducing the amount of new Bitcoin coming into circulation creates scarcity,
which is the cornerstone of supply and demand economics.
For the first halving in November of 2012,
the price rose from $11.50 to $270.
Following the next halving in July 2016,
price went from $650
to about $20,000 per Bitcoin by December 2017.
In each case, the price appreciated over 12,000%,
and, each time, it took roughly twice as long to experience the same growth.
The third halving started the most recent Bitcoin bull run in May of 2020,
where, by December, the price had seen an over 300% increase since the beginning of the year.
The price started out at $9,600
and saw heights of just under $30,000.
In 2021, Bitcoin doubled in value to $64,000 per Bitcoin
but saw a massive drop later in 2021 that erased most of the gains in that year.
Bitcoin attempted another price jump in November of the same year,
and the price saw a new all-time high of $68,000.
By January 2022,
the price had dropped back to $35,000 again.
So, whether we've seen the end of the bull run following the third halving,
well, that still remains to be seen.
Some analysts believe that we are now in the bear market,
while others believe there will be more upside for this bull cycle.
Only time will tell.
If halving cuts miner rewards in half,
which decreases inflation and lowers the available supply,
what if a halving does not increase price demand?
Will miners continue validating the network with half the incentive
and no dramatic increase in the price in USD?
Well, a safeguard for this has been programmed into the network,
a change in difficulty to get those mining rewards.
When the reward has been halved and the value of BTC doesn't increase,
the mining difficulty is then reduced.
This keeps miners incentivized because they can mine more Bitcoin in shorter amount of time.
Conversely, mining difficulty increases when market conditions are bullish
and there are more folks trying to mine Bitcoin,
which means more competition,
so the rate of blocks being made needs to be maintained.
Although the price of Bitcoin has historically seen major price crashes following the halvings,
in their subsequent bull runs,
price has always settled higher than before the halving event.
When the price of Bitcoin dropped from $20K to $3,200 in 2017 to 2018,
it was still much higher than the price before the halving,
which was $650.
Still, the effect of the halving for investors is different from the effect on miners.
For investors, the halving means increased prices and reduced supply.
Many people who've been in crypto for a long time see the halving as a great entry point
to get ahead of the market and invest in Bitcoin and other cryptocurrencies
after a long boring bear market.
For miners, the halving means diminishing rewards,
making it more difficult to compete against larger mining operations
that have a better chance at solving a block.
After all, mining is a competition where one miner will win the full reward solving a new block.
When large operations of miners come together in mining pools,
they share the reward for mining a new block,
making their profitability much higher,
giving them a greater chance in solving the block.
Price increase that benefits investors also benefits miners though.
Because when they do receive a reward,
its value in dollars is higher, of course.
It's possible that in the future,
the halving and the competition that comes along with it
could increase the probability of a 51% attack on the Bitcoin network.
Now, a 51% attack is when a group of people gains control over 50% of the blockchain's hash power.
Bad actors could then prevent transactions from getting confirmed
and halting some or all the payments.
This will allow them to reverse transactions and double-spend coins.
That's why we do need halvings to initiate price increases,
difficulty adjustments to increase and decrease rewards,
to keep a wide variety of miners incentivized to continue validating transactions
and by securing the Bitcoin network.
If the price of Bitcoin continues on an upward trajectory,
even the fees for validating the transactions on the Bitcoin network will be incentive enough
to keep miners working in the industry and keep the Bitcoin network secure.
So that's the scoop on the Bitcoin halving.
Have you learned a little bit more about what it is,
why it's been programmed into the Bitcoin network
and what it does for Bitcoin and blockchain
and, of course, the price of the very first crypto asset, BTC?
That's all I got.
Be blessed.
BitBoy out.