A Bitcoin Halvening is coming – what will happen?

In Blockchain

A bitcoin halvening is an event that happens every four years when the rewards given to Bitcoin miners for validating transactions are reduced by 50%.

So:

  • After the last halvening in 2016, the blockchain went from releasing 3,600 bitcoins every day to 1,800.
  • By the end of May 2020, the network will release just 900 bitcoins daily.

So what does this mean for traders?

What does “halvening” have to do with mining?

A Bitcoin is created when the blockchain rewards miners for validating transactions. Miners solve computational problems that allow them to chain together blocks for transactions (hence the “blockchain”).

Unlike a central bank that can issue new units of a currency at any time, the process of mining is what issues new Bitcoins. Miners are rewarded with new Bitcoins every 10 minutes. They are also rewarded transaction fees, which users pay to the network when making a transaction.

Miners typically sell their newly minted bitcoin immediately back into the ecosystem in order to cover costs, while transaction fees make up the bulk of their income.

A Bitcoin “halvening” happens at intervals of 210,000 blocks – roughly every 4 years. Bitcoin miners currently receive 12.5 BTC each time they successfully mine a block. By the end of May 2020 (the next Halvening) they will instead earn 6.25 BTC.

What are the consequences of halvening for the Bitcoin network?

Halvening is the Bitcoin network’s way of managing inflation. In traditional economies, the issuance of new units of a currency tends to devalue that currency because there is an excess in supply. However, bitcoin is capped at 21 million Bitcoins (which should be reached in 2040).

Crypto analysts estimate that as the reward for bitcoin mining gradually falls, miners will increasingly have to rely on transaction fees to cover expenses such as electricity and hardware maintenance. When all 21 million bitcoins have been mined, miners will rely solely on these transaction fees for their income.

For miners, a halvening could spell a massive drop in revenue.

If the same number of miners exist on the Bitcoin blockchain, they may increase transaction fees in order to cover their costs. Bitcoin mining already consumes more electricity than 12 US states.

However, what’s more likely to happen is that fewer miners will be able to continue. This reduces the hashing power of the network and consequently reduces the difficulty of mining new blocks. This is the beauty of the Bitcoin protocol: somehow, things just balance out.

Conclusion

Historically, halvenings have had little correlation with the price of bitcoin. There are only two ways to accumulate Bitcoin: mine or buy. Halvening simply forces more people to buy their Bitcoin on the market.

It’s impossible to predict what the next halvening will mean for the network in the long term. There are a host of external factors to keep in mind: improvements in chip technology may increase efficiency, institutional investment may drive an unprecedented amount of demand, and depending on how the next bull run goes, retail investors could either be encouraged or scared off in reminiscence of December 2017.

What do you think will be the effect of the next halvening? Tweet us at @Liquid_Global.

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This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

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Liquid

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