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The Bitcoin Halving Explained: Why It Matters For Investors


A statue of Satoshi Nakamoto, a presumed pseudonym used by the inventor of Bitcoin. Photo by Janos ... [+] Kummer

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Bitcoin BTC distinguishes itself from conventional, central bank regulated currencies by operating on a fixed supply. Specifically, only 21 million bitcoins will ever exist, with just under 2 million yet to be mined. This scarcity is managed through a mechanism known as "halving," designed to curb inflation and increase the asset's value over time.

Every four years, bitcoin's mining rewards are slashed in half, a feature embedded in its algorithm. This reduction aims to maintain the asset's scarcity and, consequently, its value.

A network of decentralized nodes validates all bitcoin transactions, a process termed as "mining." For each block of transactions added to the blockchain, miners currently receive 6.25 BTC, equivalent to around $215,000 as at today’s price. This incentive motivates them to keep the network functional. The rewards are halved after every 210,000 blocks, which occurs approximately every four years. Miners also earn transaction fees, providing an extra source of income that becomes increasingly important as the block reward diminishes.

Historical Halving Milestones

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Bitcoin's inaugural halving occurred in November 2012, followed by July 2016 and most recently in May 2020. Initially, miners were rewarded 50 BTC per block, but this amount has been halved at each event. The final halving is expected to occur in 2140, marking the mining of the 21st million bitcoin. After that, miners will solely earn from transaction fees.

Speculations Around Next Halving

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Experts predict the next halving event to happen around April 2024. While these events have been planned to minimize impact on the network, they often trigger significant price fluctuations. Historically, the price of bitcoin tends to surge a few months post-halving. Market sentiment typically becomes bullish in the lead-up to a halving, influencing trader behavior.

Investor Considerations

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Though scarcity could spike bitcoin's price, a decrease in mining activity may reduce it. The focus should be on the overall network growth rather than the timing of halving events. Investors should also consider global economic factors, such as inflation rates and financial crises, as these could indirectly affect bitcoin’s value.

As the rate of bitcoin supply gets cut in half during a halving, traders often invest in anticipation of price increases. However, past performance is not necessarily indicative of future outcomes.According to a Credit Suisse Global Wealth Report, there are 59.4 million millionaires globally as at the end of 2022. If all of these millionaires wanted to own a whole bitcoin, it would be impossible due to the fixed supply cap of 21 million. As the available supply dwindles, especially with mechanisms like bitcoin's "halving," this scarcity becomes even more pronounced, making it increasingly challenging for every millionaire to own an entire bitcoin. The available supply on exchanges is around 2,000,000, and this is expected to be around 1,000,000 at the time of the halving.

In 2012, bitcoin's first halving had a minimal impact on its price. However, the asset's value jumped before the second halving in 2016. Similarly, in the year leading to the 2020 halving, bitcoin doubled in price. Currently, the asset's value is approximately $34,500, and its behavior leading up to the next halving could differ from past trends due to other macro factors, including the approval of a spot bitcoin ETF.

Long-Term Implications

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The last bitcoin is expected to be mined by 2140, but it's possible that the rewards will be reduced to satoshis (the smallest bitcoin unit) long before that.

Bitcoin halving events are significant milestones, cutting down the rate at which new coins are created and thus affecting the asset's price and network security. While the last bitcoin is expected to be mined by 2140, the impact of these halvings on the network and its participants will evolve over time, making it a subject of constant interest and debate.

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