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What is Bitcoin Halving and why is it so important?

What is Bitcoin Halving and why is it so important?

On May 20, 2020, we will have the third edition of an event that decisively influences the direction of digital currencies, their prices and the relationship of the community in relation to mining. We’re talking about the Bitcoin Halving phenomenon.

Even with the increasing public awareness and media attention in relation to Bitcoin, Litecoin and other crypto-assets, there are still doubts about exactly what this Halving is all about. With that in mind, we have prepared this blog post, in which you will read about the Bitcoin Halving, history of occurrences, how Halvings influence the price of Bitcoin and what to expect when the next Bitcoin Halving occurs.

1. Bitcoin Halving

When Bitcoin was created in 2009, the amount of these coins was limited to 21 million units. As we are not talking about a physical asset, printed by the Central Banks and the Mint of the different nations, it is easy to understand this fixed number.

This is because entities like the Casas da Moeda maintain continuous production, created to supply the economy of a country. Bitcoin controls the number of units through a mathematical process known as mining, carried out on Blockchain – a technology for recording transactions.

Unlike traditional fiat currencies, which can be printed by central banks at will, the supply of bitcoin is limited by algorithms. There will only be 21 million bitcoins. This, by definition, makes it a deflationary asset.

As the mining process requires high computational power and a lot of electrical energy to occur, the initial reward for this effort on the part of users was 50 Bitcoins per block. In addition, a special need for network maintenance has also been established. So, with the limited number, the reward in Bitcoins decreases over time and every four years it is divided in half. This process is known as Halving.

However, it is essential to mention that the drop in the reward does not mean a devaluation of the currency as a whole. If that were true, the first Halving would have already enshrined Bitcoin’s death.

2. Occurrence history

The first Halving took place on November 28, 2012, when the reward went from 50 to 25 units. It is important to note that Bitcoin, the currency created by Satoshi Nakamoto, is based solely on advanced cryptography and mathematics.

In this way, it dispenses with intermediation by governments and financial institutions that manage to force devaluation.

On July 9, 2016, the second Halving in the history of cryptocurrency took place. Here, the reward was 12.5 Bitcoin units for each block mined. It is important to keep in mind that the price of the asset is directly related to the law of supply and demand – that is, demanded.

The second Halving brought a slight drop in price, as the opening value went from $652 to $648.49. However, after the 9th, the price varied between $662 and $670. This shows that the market itself has signaled that the demand for digital currencies has grown significantly.

In addition, looking at the numbers, it is possible to say that the event, so long-awaited by the community, did not negatively affect the currency’s value.

Another interesting fact is that Litecoin, a kind of Bitcoin clone, also had its first Halving in 2015, without its value dropping.

The next Bitcoin Halving, the third one, will take place in May 2020. With the entry of institutional investors in this market, together with individual miners, the trend is for the event to receive wide coverage in the international press.

3. How Halvings affect the price of Bitcoin

Halving tends to have positive effects on the price of cryptocurrency, especially when it comes to the long term. There are several theories to explain how this happens. One of them comes down to a simple question of supply and demand.

It works like this: if fewer Bitcoins are being generated in the market, this scarcity makes currencies valuable. However, it is important to note that this does not happen immediately.

For a more elaborate explanation of how these parts relate, it is important to examine the role of users, who carry out mining. On average, 4,380 blocks are extracted each month and added to the Bitcoin Blockchain.

Let’s assume that the current block reward is 13 Bitcoins, priced at $ 5,000. Thus, we would have the following operation

4380 x 13 x 5000 = $284.700.000 per month.

Thus, we can say that this is the total revenue that miners are extracting monthly.

So, when the first Halving took place, in November 2012, a Bitcoin was sold for about $ 11. In the following year, the price increased again at an accelerated rate, reaching a historic high of around $1,100. After which, it stabilized at around $ 220 and $ 240.

After the next half, only half of the BTC will be generated per day. (4,380 x 6.25 x 5,000 = $ 136,875,000 per month).

When the Halving happens, two things can follow: miners will simply give up since the price will drop in half, or they will refuse to sell bitcoins generated at a price below, say, $ 10,000 – in a process known as “HODLing”.

It is possible to check the previous Halvings and notice that a combination of these two things happened. That is: a small number of miners end up giving up, but most keep their activities, believing in the recovery power of this market.

How has this happened in the past? History shows us that it ends up being a mixture of both. In fact, a small number of miners will give up, while the majority will choose to keep mining and bet on this new phase.

We can exemplify this finding with what happened in the previous Halving, which took place on July 9, 2016, which kept Bitcoin’s price between $580 and $700 for several months.

At the end of the year, this value started to rise, albeit slowly. 2017 set the record price, as the unit was worth almost $ 20,000, which proves that having fewer cryptocurrencies has nothing to do, necessarily, with devaluation.

 

4. What to expect with the next Bitcoin Halving

An article in the prestigious Forbes magazine shows that the most significant occurrences of currency price volatility usually happen between 12 and 18 months after each Halving. In the first one, the price went from $11 to $1100 and then back to $200.

In the second event, Bitcoin went from $230 to $20000, stabilizing for some time at $ 4000. It is not possible to establish a single trend for what will happen in 2020, but it is possible to have an idea of ​​the panorama by studying the previous occurrences.

This is because several variables influenced each Halving. With the first occurrence, none of those involved did not know what to expect. In the second event, with the rise of Ethereum, the first initial offers of cryptocurrencies appeared.

There are even experts who bet that this Halving will be much smoother than the previous ones. This is the case with Jason Williams, co-founder, and partner of Morgan Creek Digital. He bets that the event will have minimal impacts on the currency’s value.

Jason’s theory is very interesting: according to him, the daily life community and Bitcoin’s oscillations already know everything about the event. They even know the precise date of the event.

Thus, large-scale miners operating in this currency will have to sell their Bitcoins to cover operating expenses or to cover the rest of the revenue affected by Halving with money from another source.

In addition, according to Jason Williams, new players need to enter to raise the value of the currencies. However, he concludes, the truth is that the fact that the date is already widely known and users are quite experienced in conducting these transactions, everyone is already protected against negative impacts.

However, some reports say that not everyone is that prepared. Grayscale, a large company that transacts with Bitcoin, said in a report that many of its partners were not even aware of the event known as Halving.

But there is one thing that cannot be denied. This is a really fascinating period for cryptocurrency lovers, since there is greater knowledge, by the public, about Bitcoin and its similars. In addition, it is possible to mention the increasing interest of institutional investors in this market.

Regardless of these factors, what can be observed is that there is a correlation between Bitcoin Halving and price volatility, which occurs after the event. Thus, it is possible to expect sudden changes in values.

With the aid of exchanges and trading platforms, it becomes easier to map this market and prepare for the volatility that should accompany Bitcoin Halving – unless the values ​​do not reach the 2017 record.

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