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What is Bitcoin Halving and what does it mean for the crypto community? | Explained
Just as the world of sport anxiously awaits the Olympics every four years, those that will follow cryptocurrency they look forward to their quadrennial event. While athletes train for the 2024 Games in Paris This summer, cryptocurrency traders and Bitcoin miners are preparing for what is known as the “Bitcoin Halving,” scheduled for April.
What is Bitcoin halving?
Bitcoin The halving refers to the reduction of 50%. in the reward paid to Bitcoin miners who successfully process other people’s cryptocurrency transactions so they can be added to the public digital ledger known as the blockchain.
To “grow” the Bitcoin blockchain and keep the ecosystem active, Bitcoin miners rely on advanced computing equipment to solve a complex mathematical puzzle through a process known as “Proof of work.” This intense activity is the reason why Bitcoin transactions result in huge carbon emissions and require large amounts of electricity. No real mining takes place.
Bitcoin miners equipped with cutting-edge computing equipment, working on an industrial scale, are most likely to solve the puzzle first and claim their reward, which is currently set at 6.25 Bitcoin (BTC). While the reward amount is set, the actual value of this reward varies based on BTC prices in the market and when the owner chooses to sell.
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Is there a simpler explanation?
Think of a group of grocery store cashiers competing to each bill out the same set of items, with the person who does it first (and accurately) ultimately getting a prize of ten gold coins.
Cashiers can use their favorite tools to bill items and process payment. While one person prefers to count the total with pencil and paper, another might decide to use the calculator on their smartphone, while someone else purchases a state-of-the-art computer system connected to a price scanner. The person most likely to win in this case is the cashier with the most advanced equipment, but others also have a chance of winning. This is largely a win-win system: customer mailings are billed efficiently and all cashiers do their jobs well because they want to collect the prize.
After about four years, you return to the grocery store where the cashiers still hold this contest, but the prize money has been reduced to five gold coins. Is the prize still worth the effort? This depends on the price of gold in the market and the cost of the equipment purchased by the cashiers to win gold coins.
This is one way to understand Bitcoin Halving.
Why is Bitcoin Halving important for cryptocurrency investors?
Bitcoin mining increases the supply of BTC in circulation while Bitcoin Halving reduces the rate at which these coins are released, making the asset more scarce. Scarcity is seen as a factor that pushes prices up, as is the case with gold.
While there may only be 21 million BTC in the world, over 19 million have already been “mined” or released. It seems like the end of the story, but Bitcoin’s halving means it will take a lot longer to mine the remaining coins. The halving occurs after 210,000 blocks have been mined, and has so far occurred in 2012, 2016 and 2020, every four years.
In 2009, a successful Bitcoin miner could claim a reward of 50 BTC. After this year’s halving, they will only receive 3,125 BTC. However, keep in mind that Bitcoin prices are much higher now than in 2009, so this is not necessarily a loss for the miner.
As of February 14, the price of 1 BTC was around $49,528. This means that a mining reward on February 14th would be worth approximately $3,09,550 (6.25 x price of 1 BTC). Whether this value will increase or decrease after the Bitcoin halving depends on the price of Bitcoin.
Both corporate and independent miners are spread across the world, trying to take advantage of cheap electricity prices in countries like Kazakhstan and Iran to mine as much Bitcoin as possible. China was originally home to many of the world’s cryptocurrency miners, but government crackdowns have triggered an exodus to other countries.
What impact will Bitcoin Halving have on investors?
This depends on the investor in question and the extent of their involvement with Bitcoin and its ecosystem.
For example, an enterprise-level miner who has burned through his wallet paying for Bitcoin mining hardware (and the electric bills that come with powering it) is probably desperate to earn the block reward these past few days while he is still set at 6.25 BTC rather than the much lower 3,125 BTC.
On the other hand, a new trader who has invested a small amount of money in Bitcoin via their own cryptocurrency exchange via a phone app and knows nothing about the underlying blockchain technology he might not even react to the news of the halving.
Meanwhile, a more experienced trader who has looked at past halvings might try to increase their investment in Bitcoin in hopes of benefiting from a possible price rise, even as another might “short” Bitcoin hoping to profit from a possible collapse of prices.
What will happen to the cryptocurrency market after the next Bitcoin Halving?
The short answer: almost no one knows.
The answer is long: Countless self-styled cryptocurrency traders, financial analysts, fintech engineers, cryptocurrency influencers and statisticians claim they can predict Bitcoin’s price trajectory with the help of cryptocurrency models and metrics, but investors should know that these These are all plausible hypotheses. improve.
Many Bitcoin investors and observers also refer to a recurring 4-year cycle that depends on halvings, or even argue that prices increase after halvings. But in reality, the coin’s journey has been much more unpredictable and difficult to track.
Each halving in Bitcoin’s history has been very different due to an eclectic mix of blockchain-related factors, increasing regulation by regulators around the world, increased awareness about cryptocurrency investing, increased adoption of Bitcoin, and various geopolitical events or economic shocks. Bitcoin is an asset whose price is largely influenced by investor emotions, and there is even a “Fear and Greed” indicator to help investors understand how prices might suddenly change.
While the upcoming Bitcoin halving will be a fascinating episode to witness, it is best for cryptocurrency watchers to rely on their own research and decide what the halving will mean for them personally.
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