Bitcoin halving is one of the most important events on the Bitcoin blockchain. It induces cryptocurrency price inflation by reducing the number of bitcoins in circulation and increasing demand for Bitcoin. This reward system will continue until around 2140, when the proposed limit of 21 million is reached. At that time, miners will be rewarded with fees, which will be paid by network users, for processing transactions.
This process has proven successful twice, resulting in an increase in price followed by a big fall. However, the declines that have followed these gains have kept prices higher than before these halves. To explain what a Bitcoin halving is, we must first understand a little how the Bitcoin network works. The underlying technology of Bitcoin, blockchain, basically consists of a set of computers (or nodes) that run the Bitcoin software and contain a partial or complete history of the transactions that occur on its network. Each full node, or a node that contains the entire transaction history in Bitcoin, is responsible for approving or rejecting a transaction on the Bitcoin network.
To do this, the node performs a series of checks to ensure that the transaction is valid. Bitcoin mining is the process by which people use their computers to participate in the Bitcoin blockchain network as a processor and validator of transactions. Bitcoin uses a system called Proof of Work (PoW). This means that miners must demonstrate that they have worked hard to process transactions in order to be rewarded. This effort includes the time and energy required to run computer hardware and solve complex equations. The term mining is not used in a literal sense, but rather as a reference to the way in which precious metals are collected.
Bitcoin miners solve mathematical problems and confirm the legitimacy of a transaction. They then add these transactions to a block and create chains of these transaction blocks, forming the blockchain. When a block is filled with transactions, miners who processed and confirmed transactions within the block are rewarded with bitcoins. Higher monetary value transactions require more confirmations to ensure security. After every 210,000 blocks mined, or approximately every four years, the block reward given to Bitcoin miners for processing transactions is halved.
This event is known as halving because it halves the speed at which new bitcoins are released into circulation. This has some implications for investors, as other assets with a low or finite supply, such as gold, can be in high demand and drive up prices. In case the reward has been halved and the value of Bitcoin has not increased, the difficulty of mining would be reduced to keep miners incentivized. This means that the amount of bitcoins released as a reward is even smaller, but the difficulty of processing a transaction is reduced. This reward system will continue until around 2140, when the proposed limit of 21 million is reached. These fees ensure that miners continue to have the incentive to mine and keep the network running. Halvings reduce the rate at which new currencies are created and, therefore, decrease the available amount of new supply, even as demand increases.
This process has proven successful twice so far. The third halving came not only during a global pandemic but also in an environment of increased regulatory speculation, increased institutional interest in digital assets, and celebrity hype. Considering these additional factors, it is unclear where the price of Bitcoin will ultimately be set after the fallout. Since the Bitcoin halving is an important event, it has a major effect on various parties involved in the Bitcoin network. Here is a brief overview of how it affects major stakeholders and talking points on the bitcoin network. In other words, this is how Bitcoin uses a synthetic form of inflation that halves every four years until all Bitcoin is released and in circulation.
As a result of this process, investors can expect an increase in price followed by a big fall after each halving event. Around 2140 when all 21 million bitcoins have been mined and released into circulation, miners will still be incentivized to continue validating and confirming new transactions on the blockchain because transaction fees paid to miners are expected to increase in value due to higher volume of transactions attached with fees and higher nominal market value for bitcoins.
