Explainer: What is the ‘Halving’ of Bitcoin, How does it occur, and Is It Important?

Depending on your point of view, Bitcoin’s much-awaited “halving” is either a significant development that would enhance the cryptocurrency’s worth as a scarcer good or just a technical quirk hyped up by traders to drive up its price. Following bitcoin’s all-time high of $73,803.25, in March, there will be a halving.

However, what is the halving precisely, and is it really that important?

Describe it.

The goal of the halving, which occurs around every four years and the most recent of which is anticipated this week, is to slow down the creation of new bitcoins by altering the underlying blockchain technology.

From the beginning, Satoshi Nakamoto, the anonymous inventor of Bitcoin, intended for there to be a limited amount of 21 million tokens.

The halving was coded by Nakamoto and operates by slowing down the pace at which new bitcoins are created and put into use.

Approximately 19 million tokens have been distributed so far.

How is it possible?

With blockchain technology, information is recorded in what are known as “blocks,” which are then added to the chain via a process known as “mining.”

Miners develop the blockchain by applying processing power to intricate mathematical challenges; they are rewarded with fresh bitcoin.

Every 210,000 blocks added to the network, or about every four years, the blockchain is planned to undergo a halving.

The quantity of bitcoin that is accessible to miners as rewards is halved at this point. As a result, mining becomes less lucrative and the number of new bitcoins produced decreases.

WHAT IS IT RELATED TO THE PRICE OF BTC?

Some supporters of bitcoin contend that its rarity adds to its worth.

When individuals want to buy more of a good, the price should go up since there is less of it available overall. They contend that Bitcoin is no different.

Some contest the reasoning, pointing out that the cost would have already taken into account any effects.

The market’s supply of bitcoin is also mostly determined by cryptocurrency miners, however, the industry is opaque and there is a lack of information on supplies and inventory. Prices may be under pressure to drop if miners sell their reserves.

Following its historic highs last month, the price of bitcoin has fallen below $64,000. This week, JP Morgan analysts said that they anticipate more price declines after the halving.

Determining the causes of a cryptocurrency surge is especially challenging, in part because there is far less openness than in traditional markets.

The U.S. Securities and Exchange Commission’s approval of bitcoin ETFs in January and predictions that central banks would lower interest rates are the most often cited reasons for this year’s spike.

However, in the speculative realm of cryptocurrency trading, justifications for price swings have the potential to spiral into self-fulfilling market narratives.

Secondly, what about earlier halves?

There’s no proof that the following price increases in bitcoin are due to past halvings.

To attempt to get an advantage, merchants and miners have examined previous halvings.

The price increased by around 12% in the week that followed the previous halving on May 11, 2020, and by 659% in the next year.

However, there was no concrete proof that the halving was the cause of the increase, with a number of plausible causes including lax monetary policy and stay-at-home individual investors with more income.

A previous halving took place in July of 2016. The next week saw a 1.3% increase in Bitcoin prices before it fell a few weeks later and then surged again.

In summary, it’s difficult to determine the precise effect that past halvings may have had or to forecast future outcomes.

Authorities have cautioned over and over again that the bitcoin market is speculative, hype-driven, and dangerous for investors.