In the Bitcoin network, one important event is very influential and eagerly awaited by Bitcoin enthusiasts, namely the Bitcoin halving.
Please note this Bitcoin halving event takes place once every four (4) years and will then fall in 2024.
A Bitcoin halving reduces the rate at which new coins are created, decreasing the amount of new supply available. The reason is that the price for mining transactions will be halved at the Bitcoin halving.
So, to better understand what a Bitcoin halving is, its effect on the price of Bitcoin, to its impact on the market as a whole, see the following review.
What is Bitcoin Halving?
Bitcoin Halving is an event that occurs once every four years when the block rewards or rewards earned by Bitcoin miners are cut in half. This event occurs every 210,000 blocks or about once every four years.
It is important to know the idea behind this halving event is to limit supply and slow down the speed at which new Bitcoin enters the market. On the other hand, halving implementations have different main functions and goals depending on the context.
Some examples of the main functions and objectives related to the implementation of halving, among others, are to reduce the inflation rate of these digital assets. In addition, other main functions and objectives are to regulate the supply of digital assets, increase asset value, and improve network security.
Bitcoin Halving Mechanism
It is important to note that Bitcoin halvings occur about every four (4) years or after approximately 210,000 blocks have been mined. It takes place as part of a mechanism determined from the start of the Bitcoin protocol.
Each block on the Bitcoin network contains transactions collected by miners. These miners use their computing power to solve complex cryptographic algorithms, namely proof-of-work (POW).
When miners have successfully solved the algorithm, they will create a new valid block and add it to the Bitcoin blockchain. As an incentive, miners are rewarded with new Bitcoins.
At first, or at the launch of Bitcoin back in 2009, the price was set at 50 Bitcoins per block. However, as part of Bitcoin’s design, the block reward is halved for every 210,000 blocks mined.
Therefore, after the first halving, the block reward has decreased to 25 Bitcoins, 12.5 Bitcoins after the second halving, and so on.
Supply and Demand Impacts
It is also important to understand that the Bitcoin halving will affect the new supply of Bitcoin entering the market, i.e., by reducing the rate of new mining.
This is because, after each halving, the rewards for miners will be halved. Thus, the number of new Bitcoins produced in each block will be halved.
As for before the halving, when the block reward was still 50 Bitcoins, around 1,800 new Bitcoins were produced every day—if the average block time was around 10 minutes, however, after the first halving, the number of new Bitcoins produced per block became 25 Bitcoins.
Then, after the second halving, that number will decrease to 12.5 Bitcoins per block. Furthermore, after the third halving, the figure becomes 6.25 Bitcoins per block.
It should be noted by reducing block rewards. Halvings will limit the new supply of Bitcoin coming into the market. This then creates a supply and demand effect that can impact the price of Bitcoin.
In this case, when the new supply decreases while demand remains high or even increases, the price of Bitcoin tends to rise. Ultimately, the impact of the halving on the new supply of Bitcoin will significantly affect the Bitcoin economic cycle.
The market expectations and perceptions before and after the Bitcoin halving can significantly affect the price of Bitcoin.
In this case, market perception refers to the views and beliefs of market participants regarding the future of Bitcoin. On the other hand, expectations refer to expectations and predictions about what will happen after a halving occurs.
If expectations after the halving are unmet or market perception becomes negative, it could affect sentiment and cause a bigger sell-off, potentially depressing Bitcoin price.
However, on the other hand, if expectations are met or exceed expectations, it can create positive sentiment and push Bitcoin prices up.
Bitcoin halving also has a psychological impact that can drive interest and further demand from investors and traders. The psychological factors involved include, among other things, the anticipation of profits from investors and traders.
In this case, before the halving, many investors and traders are anticipating an increase in the price of Bitcoin after the halving. Expecting that potential profit could drive greater interest in buying Bitcoin before the halving.
Long Term Effect
Bitcoin halvings also have long-term effects that sometimes take time to happen. However, even if these halving events occur at a certain point, the impact on the price of Bitcoin can be felt over a longer period.
One of the contributing factors is related to the time it takes to distribute Bitcoin. After the halving occurs, a decrease in the rate of new mining will affect the new Bitcoin supply.
Besides that, before the halving, many market participants also anticipated an increase in the price of Bitcoin after the halving. As a result, some investors and traders may have bought Bitcoin before.
Furthermore, regarding the Bitcoin halving, external factors and changes in supply and demand over time also play an important role in it. These external factors are, for example, news and announcements related to Bitcoin.
For example, news regarding the adoption of Bitcoin by major financial institutions can influence market perceptions, creating a sentiment that influences the price of Bitcoin after the halving.
Meanwhile, this change in supply and demand could be related to a decrease in new supply. The reason is the halving will reduce the rate of new mining and Bitcoin supply entering the market.
Over time, this decline can also create an imbalance between supply and demand. If demand continues to increase or even stabilizes while new supply decreases, the price of Bitcoin tends to rise.
Impact on Miners
The Bitcoin halving will also have a significant effect on Bitcoin miners. This can be influenced by several factors, one related to reducing rewards.
As mentioned earlier, halving will reduce or block the rewards miners receive. Thus, this certainly impacts miners’ income and profits, especially if operational costs are still high.
Besides that, halving also forces miners to adjust their strategies to continue benefiting from mining. On the other hand, smaller block rewards will also make competition among miners tougher.
Therefore, Bitcoin halvings can pose significant challenges for miners in maintaining the profitability of their operations, which include high electricity costs and the need to adjust the hardware used.
This is important so that mining hardware, such as an ASIC miner, remains efficient and produces a fairly high hash rate. Miners may also increase their mining capacity/upgrade their hardware to stay competitive.
However, although the challenges miners face regarding Bitcoin halving are quite significant, there are also several opportunities they can take advantage of, one of which is the increase in the price of Bitcoin.
The reason is Bitcoin halving can reduce the rate of new mining and make the Bitcoin supply more scarce. If demand continues to increase or even stabilizes, this can drive up the price of Bitcoin, which is profitable for miners.
In addition, another opportunity is related to technological innovation. For example, miners can look for ways to increase energy efficiency and mining capacity or create new, more effective solutions.
With this technological innovation, miners will also be helped to increase their profitability and competitive advantage in facing the halving challenge.
In conclusion, understanding the Bitcoin halving and its impact on prices and markets is important for all crypto market participants, including investors, traders, and miners, to know.
Later, with a good understanding, market participants can be wiser in making decisions, managing risks, and understanding market changes due to Bitcoin halving events.
It is important to understand again that investing in digital assets such as Bitcoin will indeed involve risks and uncertainties. However, this can be anticipated by conducting a thorough analysis before investing.
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