Bitcoin Halving, means halving the reward for mined blocks.
This means that miners receive about 50 percent less Bitcoin for verifying their transactions. Bitcoin halving means that periodically, about once every four years, the number of new BTC created in each block and issued to the miner as a reward is halved.
The prerequisite for this event is to ensure the limitation of the existing Bitcoin. This restriction, in turn, pursues the goal of keeping inflation at a low level.
The last halving of the Bitcoin exchange rate occurred on May 11, 2020, the next one is scheduled for March 12, 2024. The process will be repeated approximately every four years until the maximum amount of Bitcoin is reached. This is expected to happen in 2144.
Bitcoin Halving: how the concept works
The halving should be considered in the context of mining, and the main task of mining is to confirm transactions and monitor the blockchain.
This task is resource-intensive, therefore, as a reward, the BTC is paid. The amount of this reward is firmly fixed in the Bitcoin source code, and it is impossible to influence it.
The reward was set by Bitcoin developer Satoshi Nakamoto and fixed in the code. In 2009, the reward was 50 BTC.
The Bitcoin Halving Reward was regularly reduced after 210,000 blocks, about once every four years.
After the first halving, it was 22.5 BTC, after the second – 12.5. Currently, it is 6.25 BTC. Since a new block is created in the blockchain approximately every ten minutes, 6.25 new BTC is created every ten minutes.
Inflation and deflation
Halving BTC is so important because Bitcoin’s supply is limited to 21 million coins.
Halving gradually reduces the number of Bitcoin rewards, so that the price of BTC is steadily increasing, while demand remains constant. This correlation can be deduced from three past halvings in 2012, 2016 and 2020, each of which led to a significant increase in the price of BTC.
But in fact, halving Bitcoin is a protective mechanism: halving is used to reduce the speed of putting new coins into circulation. It serves as a virtual or synthetic form of inflation that works as follows:
- If new Bitcoins are produced, it means that the money supply is increasing. This will not necessarily lead to inflation if countermeasures are taken.
- If the supply of money increases at the same rate as the number of people using the currency, then prices can be kept stable and inflation can be prevented. If demand grows faster than the supply of money, there is an increase in value for the former holders of the currency.
Reducing the supply of Bitcoin and the impact on the price of BTC
Halving the reward has a strong impact on the Bitcoin market and its price. After each event associated with halving, Bitcoins become much smaller. As a result, the selling pressure from the miners decreases after each halving event.
This is due to the fact that miners immediately after halving receive only half of their previous earnings, measured in US dollars. Therefore, from an economic point of view, it makes sense for a miner to hold Bitcoin, thereby reducing the freely available supply, and expecting prices to rise due to the created shortage.
As a result, the price of Bitcoin stabilizes, and after a while increases significantly.
Since Bitcoin occupies more than half of the current market capitalization among all cryptocurrencies, halvings affect not only BTC, but also the rest of the cryptocurrency market.
Halving in 2012
The first halving event took place on November 28, 2012. The reward was halved – from 50 to 25 BTC. The value of the asset at that time was $12.35. After 150 days, the price rose to 127 US dollars. The price peaked at the end of the following year, in December 2013, when it was $1,038.
Similar movements occurred during the next two rounds.
During the second event in July 2016, BTC started at about 650 USD. Within a year and a half, the price rose to almost $20,000. Over the next year, the price dropped to about $3,200.
After the second decrease in the reward, the Bitcoin price was trading in the price range from $575 to $20,000.
In the second half of the year, the price grew as rapidly as it fell, but it should be noted that even after a sharp drop, the price remained almost 400 percent higher than before the first half of 2016.
The first two halves showed similar price patterns, and in both cases, the halves marked the beginning of a new bull market. The price of BTC rose significantly both before and within a few months after the halving. In some cases, the price has increased by 12 000 – 13 000 percent.
The price structure was the same for both events, but the growth period was longer for the second half. In the first half of the year, the period between the lowest and the highest price was 511 days, in the second half – 1,068 days. Moreover, the growth in the first half of the year was not only faster, but also stronger.
In both cases, most of the price increase occurred after the halving, and a new historical maximum of the BTC price was reached.
Paving the way to $100,000?
Before the last reduction to date on May 11, 2020, similar trends were expected, based on the price dynamics of the last two cuts. The forecasts turned out to be correct, since the third timeframe also saw a significant increase in the BTC price, although it was smaller compared to the other two timeframes.
If in the first two half-years the price increased by 277 (comparison of 2009-2012) and 531 (comparison of 2012-2016) percent, then in the third half of the year the growth was only 180 percent. Precisely because the first two timeframes caused such a strong price movement, expectations for the third timeframe were particularly high.
However, there was no immediate effect, so the expectations were followed by disappointment: on the morning after the price halved, it was just under $8,800 and, thus, was as high as in the days preceding the event.
Medium-term supply shortage leads to price increases
However, the third half of the year also showed the same long-term trend as the first two half-years: with the start of the new year, the BTC price reached a record high of $28,964. The positive price trend began in the fall of 2020, and has only been growing since then. In 2021, the price increased by 124.5 percent.
A lot of scientific studies have been published on the price-halving ratio, which not only analyzes data for past periods in detail, but also makes predictions about the next reduction in remuneration in 2024.
Halving and the stock-flow model
Based on what has happened to date, the question for many investors is what else can be expected in the coming months and years. To be able to anticipate this, you can apply the stock-flow model. The stock-to-flow ratio basically describes the rarity of a commodity and can be applied to Bitcoin.
The model works with a value that represents the available amount of an asset. This value is a margin. The amount of BTC that is added to this stock each year is a stream. The ratio of these two values describes the total time it will take to reach the total margin at the current pace.
The most prominent representative of this mathematical model is the crypto analyst PlanB. PlanB was the first to project this model on Bitcoin, and to date, he has predicted the Bitcoin price rate with the highest possible accuracy depending on the halving of Bitcoin.
PlanB uses the S2F model for the price of BTC
The model is mathematically accurate, and for this reason is often used to predict Bitcoin.
If we follow the S2F model, then in 2022 the BTC price is projected to be $ 100,000.
Various studies show a clear statistical correlation between the actual BTC price rate and the simulated stock-to-flow rate.
In 2022, the market is still reacting to the halving that occurred in 2020. For this reason, expectations of the next halving of remuneration, which is expected on March 12, 2024, are very high.
Although the past price movement is not a guarantee of future growth, past trends suggest that the next halving will again be accompanied by growth, albeit more moderate and slow.