The crypto market is at its lowest point in the first months of 2023 compared to 2021 when most digital currencies recorded all-time highs, but it is showing signs that the market is in the process of bouncing back compared to 2022. And the crypto experts believe that we have experienced a downturn. all reason to think that we will soon enter a new bull market, considering that we are less than a year away from a significant event in this sector, Bitcoins halving, which usually causes prices to rise at the beginning and afterward.
This halving, which occurs once every four years, reduces the number of new Bitcoins mined to ensure the supply does not exceed a set amount. Due to the historical gains made from previous halving events, many investors expect the next halving event, expected to occur in April or May 2024, to cause a rally.
What is Bitcoin halving?
We have mentioned the term Bitcoin Halving, but not everyone knows what its implications are. Let’s try to find out what this event means for Bitcoin. It is widely known that Bitcoin is the first cryptocurrency created on the blockchain. Blockchain is a distributed ledger made of blocks, which are files containing 1 megabyte of transaction records. Bitcoin relies on proof-of-work consensus, meaning miners must compete to solve complex mathematical problems to confirm blocks and earn rewards. Miners use special hardware to complete the process and generate the hash.
What does this have to do with the halving event?
When Bitcoin was first introduced, miners earned 50 BTC for every block they confirmed. At that time, Bitcoin was not as valuable as it is today, and the only way to attract miners to produce hash was to reward them with greater amounts of Bitcoin. However, Bitcoin was created to have a limited supply of 21 million coins, so the network has to slow down the rate at which new coins are mined. The first halving event occurred in 2012 when the network reduced its reward from 50 to 25 BTC. The following happened in 2016 when the reward dropped to 12.5 BTC for one mined block. The last halving in 2020 dropped the number of Bitcoins to 6.25. Subsequent halving cycles will continue to reduce rewards until the blockchain produces its last Bitcoin in 2140.
Why is Bitcoin experiencing a halving event?
The Bitcoin protocol defines halving events as the main mechanism designed to control the number of Bitcoins in circulation. The main reasons why Satoshi Nakamoto created Bitcoin to record halving cycles are:
To control the supply and turn Bitcoin into a scarce asset
Satoshi Nakamoto, the anonymous Bitcoin developer, created it as a digital currency with a managed and limited supply. Reducing miner rewards every four years will reduce the rate of new token creation. As Bitcoin becomes increasingly scarce over time, its value increases and becomes a deflationary asset.
To control the inflation rate
Bitcoin’s halving cycle also aims to limit rising inflation in the network. When the block reward is lowered, the rate of introduction of new tokens in the market decreases. The controlled issuance process is intended to keep the digital currency valuable and stable in the long term.
To keep prices as high as possible
Each halving event has a positive impact on the price of Bitcoin. Price appreciation and positive market sentiment always result from these events. They are connected to demand and supply factors that determine the value of an asset. When demand increases and supply decreases, asset prices soar. However, we should highlight that past performance does not guarantee that Bitcoin will follow the same trajectory as a series of other factors also influence its value.
To face the market economy and external forces
The halving cycle impacts not only Bitcoin but the entire crypto market as Bitcoin is the largest cryptocurrency by market capitalization and influences the price of all other assets when it registers a change in its value. This also impacts miners’ strategies as they need to modify their operations to remain profitable. Halving events make the Bitcoin ecosystem a more competitive environment and push less productive miners off the network. Halving also impacts the decentralization and overall security of cryptocurrencies.
Should we expect an increase in the following months?
Many crypto enthusiasts believe that the next Bitcoin halving will bring a new bull market. Digital currencies are still relatively new compared to other assets, making it difficult to predict where the industry will go in the long term. It is important to note that the halving event only brings changes for Bitcoin miners. There is a misconception that this cycle reduces the supply of Bitcoin; they actually just reduce the amount of reward miners get for confirming new blocks. The White Paper stipulates that there will only be 21 million coins, leaving Bitcoin’s overall supply unchanged. However, the quantity available on the market at any given time is lower than before. And although the Halving had an impact on the price of Bitcoin, and we saw price changes in the months before and after the event, the halving did not occur long before the event.
Investors should expect that as Bitcoin becomes scarcer, it will become more expensive. Crypto analysts looked at charts of how Bitcoin’s value fluctuated over a four-year cycle and identified a correlation between its increase in value and its scarcity.
What will happen if a large number of miners quit?
One consequence of cutting rewards is that a large number of miners will abandon their efforts. This can be detrimental to digital currencies hash rate, which is computing power dedicated to generating new tokens. However, previous halving events show that miners are not abandoning ship because they are aware of the four-year cycle and have prepared strategies to deal with the consequences. Once the event is over, the proceeds will benefit miners and investors. While some benefits may take longer to materialize, they will eventually occur. Mining Bitcoin will continue to generate profits even if the rewards fall as the price of the cryptocurrency increases. So one coin will be more valuable than before.
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