11th May 2020, the date won’t have meaning for most people, but for crypto and Bitcoin enthusiasts it's a big day. Like a leap year, this day comes around once every four years. Today is the next Bitcoin Halving event.
Mining, rewards and the Halving 🤩
To understand what the halving is, and why it matters, we need to quickly look at Bitcoin miners and their role in the ecosystem:
When a Bitcoin miner successfully mines a block which means it gets added to the Blockchain, they are given Bitcoin as a reward for ‘spending’ their electrical power to solve ‘the mining problem’. This is how all miners are incentivised to keep mining.
This reward is currently 12.5 BTC, but Every 4 years this amount halves. On 11th May the reward is going to be halved to 6.25 BTC moving forward, meaning that miners get paid less for mining, and less BTC is created per block (eventually going to zero at some point in the future).
And what is ‘the mining problem’? This refers to the problem miners have to compete against each other to solve the fastest in order to ‘win’, and be the miner that gets to mine the current block (and therefore receive the BTC reward).
Specifically they have to get a SHA256 hash of the previous block to start with a certain amount of zeros by adding random numbers and letters to the previous block until it works. Yikes, what does that mean? Simply put, it’s like they are all trying to solve a giant sudoku puzzle against the clock, difficult to solve, but easy to verify the solution is correct once solved. Once everyone agrees who the winner is, the block is mined, the miner gets the reward, and the process begins again.
The halving event is one of the things that contributes to its scarcity as an asset: The supply of Bitcoin is halved every four years, until a point of the future when no new Bitcoin can be created, and the total amount of Bitcoin is 21 million. This means over time, Bitcoin essentially becomes more scarce, and is inflation proof. In a time when national governments are embarking on unprecedented money printing programs to combat the economic effects of Covid-19 lockdowns thus devaluing their national currencies, this makes Bitcoin very interesting to investors and traders looking for alternative assets to protect their cash from these effects.
What’s happened in previous halving events? 🤔
What happens when you reduce supply of an already scarce asset and also demand increases? In theory you would expect the price of the asset to rise, economics 101. The first halving in 2012 was when this theory would be put to the test.
No one really knew what would happen, but it turned out to be a positive moment for the currency with prices increasing over the next 12-18 months.
Then at the next halving event in 2016 when the price of Bitcoin was $650.63, Bitcoin gradually went on a meteoric rise to an all time high of $19,783.06 in 2017 before declining all the way back down to around $3,000 in 2018.
This was the first time the currency garnered world wide media attention and saw people who overlooked the currency previously to start investing. This helped to bring the currency into the modern day world where you could use it to buy items in shops as mentioned in the previous article.
What can we expect from this halving event? 🕵️♀️
This event is the same as the previous ones, no one really knows what will happen but as investors are better educated by looking at what happened previously, many suggest the price will rise over time.
Some investors are expecting this year's halving event to have a profound effect on the value of Bitcoin over the next 12 months, as the effects of the reduced reward and reduced supply affect the overall economics of the ecosystem. However this is in no way guaranteed and anything can happen.
How will it affect all Cryptocurrencies? 💰
Although it is only Bitcoin that is being halved, it will most likely have a knock on effect to the rest of the cryptocurrency market.
The interest of the general public tends to wax and wane as time goes on. As public interest in Bitcoin increases (often due to increased press articles around volatility and price moves) this can also affect the price of alternative cryptocurrencies (known as “altcoins”). This is particularly evident in bull runs and crashes.
During a bull run people who feel like they have missed the Bitcoin boat often buy alt-coins as they see they are priced much lower than Bitcoin (they don’t tend to look at other factors though). Like in normal markets, ‘a rising tide lifts all boats’.
And during a BTC bear market people often lose confidence in the whole sector and sell their altcoin holdings as well.
For more on crypto, and to start trading, head to the Revolut app and tap on 'Cryptocurrency' from the dashboard.
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