What is the Bitcoin halving? And what does it mean for the crypto community? | Explained

Just as the sports world looks forward to the Olympics every four years, those who follow cryptocurrencies look forward to the Olympics every four years. As athletes train for the 2024 Olympics in Paris this summer, crypto traders and Bitcoin miners are preparing for the so-called “Bitcoin halving” predicted to occur in April. .

What is Bitcoin halving?

Bitcoin halving refers to a 50% reduction in the compensation paid to Bitcoin miners who successfully process another person's cryptocurrency transactions so that they can be added to the public digital ledger known as the blockchain .

To “grow” the Bitcoin blockchain and keep the ecosystem running, Bitcoin miners rely on sophisticated computer equipment and solve complex mathematical puzzles through a process known as “proof of work.” Solve. This intense activity is why Bitcoin transactions have a huge carbon footprint and require huge amounts of electricity. No actual mining takes place.

Equipped with state-of-the-art computer equipment and operating on an industrial scale, Bitcoin miners are most likely to be the first to solve the puzzle and claim the prize, which is currently set at 6.25 Bitcoins (BTC). Although the reward amount is set, the true value of this prize will fluctuate based on his BTC price on the market and when the owner chooses to sell.

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Is there a simpler explanation?

Consider a group of grocery store cashiers participating in a contest in which they each claim the same set of items, and the person who claims first (and correctly) wins a prize of 10 gold coins at the end.

Cashiers can use their favorite tools to bill items and process payments. Some people may prefer to calculate their totals with paper and pencil, while others decide to use a calculator on their smartphone, and still others use a state-of-the-art computer system connected to a price scanner. I might buy it. In this case, the cashier with the most advanced equipment is most likely to win, but others also have a chance to win. This is pretty much a positive system for everyone. Customer items are charged efficiently and all cashiers want to receive their prizes, so do your job properly.

When I returned to the grocery store some four years later, the contest was still in the register, but the prize had been reduced to five gold coins. Is the prize still worth the effort? It depends on the price of gold in the market and the cost of the equipment purchased by the cashier to acquire gold coins.

This is one way to understand the Bitcoin halving.

Why is Bitcoin Halving Important for Crypto Investors?

Bitcoin mining increases the supply of BTC in circulation, but the Bitcoin halving reduces the rate of release of these coins, increasing the scarcity of the asset. As with gold, scarcity is thought to drive prices up.

There are only 21 million BTC in the world, but over 19 million have already been “mined” or released. That sounds like the end of the story, but Bitcoin's halving means it will take even longer for the remaining coins to be mined. Halving occurs after 2,10,000 blocks are mined and so far it has occurred every 4 years in 2012, 2016 and 2020.

In 2009, successful Bitcoin miners could receive a prize of 50 BTC. After this year's halving, they will only get 3.125 BTC. However, keep in mind that the price of Bitcoin is now much higher than it was in 2009, so this is not necessarily a loss for the miners.

As of February 14th, the price of 1 BTC was approximately $49,528. This means that the February 14 mining reward is worth approximately $3,09,550 (price of 6.25 x 1 BTC). Whether this value increases or decreases after Bitcoin halving depends on the price of Bitcoin.

Corporate and independent Bitcoin miners are scattered around the world, looking to take advantage of cheap electricity prices in countries like Kazakhstan and Iran to mine as many Bitcoins as possible. China was originally the home of many of the world's cryptocurrency miners, but government crackdowns have led to their outflow to other countries.

How will Bitcoin halving affect investors?

This depends on the investor in question and how involved they are with Bitcoin and its ecosystem.

For example, enterprise-level miners who have depleted their wallets paying for their Bitcoin mining hardware (and the electricity costs that come from powering it) have probably spent the last few days with block rewards still set at 6.25 BTC. You will be desperately trying to get it. Instead of a much lower 3.125 BTC.

On the other hand, new traders who have invested small amounts of money in Bitcoin through a cryptocurrency exchange via a phone app and know nothing about the underlying blockchain technology may not even react to the halving news. .

On the other hand, an experienced trader who has experienced past halvings may seek to increase their investment in Bitcoin in hopes of profiting from the potential for a price crash, while another One might “short sell” Bitcoin in hopes of profiting from the potential.

What will happen to the crypto market after the next Bitcoin halving?

Simply put, almost no one knows.

Long answer: Countless self-proclaimed crypto traders, financial analysts, fintech engineers, crypto influencers, and statisticians claim that they can use crypto models and indicators to predict Bitcoin’s price trajectory. However, investors should know that these are all educated guesses. The best.

Many Bitcoin investors and watchers have also mentioned the regular four-year cycle that depends on the halving, and even claim that the price will skyrocket after the halving. But in reality, the trajectory of a coin is much more unpredictable and difficult to plan for.

The halving in Bitcoin's history was driven by an eclectic mix of blockchain-related factors, increased regulation by legislators around the world, increased awareness of crypto investing, increased adoption of Bitcoin, and various geopolitical factors. They vary greatly depending on events, economic shocks, etc. Bitcoin is an asset whose price is primarily driven by investor sentiment, and there is even a “Fear and Greed” indicator to help investors understand how prices can change suddenly.

The next Bitcoin halving will be an interesting episode to witness, but crypto watchers are best able to decide what the halving means to them personally based on their own research.