Just as the sporting world eagerly awaits the Olympics every four years, those following cryptocurrency look forward to their own quadrennial event. As athletes train for the 2024 Games in Paris this summer, crypto traders and Bitcoin miners are preparing for what is known as the ‘Bitcoin Halving’—predicted to happen in April.
What is the Bitcoin Halving?
The Bitcoin Halving refers to the 50% reduction in the reward paid to Bitcoin miners who successfully process other people’s cryptocurrency transactions so that they can be added to the public digital ledger known as the blockchain.
In order to “grow” Bitcoin’s blockchain and keep the ecosystem running, Bitcoin miners rely on advanced computer equipment to solve a complex mathematical puzzle through a process known as ‘Proof of work.’ This intense activity is the reason Bitcoin transactions result in huge carbon footprints and require vast amount of electricity. No real mining is carried out.
The Bitcoin miners with cutting-edge computer equipment, working on an industrial scale, are most likely to solve the puzzle first and claim their prize, which is currently set at 6.25 Bitcoin (BTC). While the reward amount is set, the true value of this prize fluctuates based on BTC prices in the market, and when the owner chooses to sell.
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Is there an easier explanation?
Think of a group of grocery store cashiers who are in a contest to each bill the same set of items, with the person doing it first (and accurately) getting a prize of ten gold coins at the end.
The cashiers can use their favourite tools in order to bill the items and process the payment. While one might prefer to tally up the total with paper and pencil, another might decide to use their smartphone calculator, while someone else buys a state-of-the-art computer system attached to a price scanner. The person most likely to win in this case is the cashier with the most advanced equipment, but the others stand a chance of winning as well. This is largely a positive system for everyone: the customers’ items are efficiently billed and all the cashiers do their job well because they want to claim the prize.
After four or so years, you return to the grocery store where the cashiers still have this contest, but the prize money has been reduced to five gold coins. Is the prize still worth the effort? That depends on the price of gold in the market, and the cost of the equipment that the cashiers bought in order to win the gold coins.
This is one way to understand the Bitcoin Halving.
Why does the Bitcoin Halving matter to crypto investors?
Bitcoin mining increases the supply of BTC in circulation while the Bitcoin Halving reduces the rate at which these coins are released, making the asset more scarce. Scarcity is seen as pushing up prices, as is the case with gold.
While there can only ever be 21 million BTC in the world, over 19 million have already been “mined” or released. This sounds like the end of the story, but the Bitcoin Halving means it will take far more time for the remaining coins to be mined. A halving takes place after 2,10,000 blocks are mined, and has happened so far in 2012, 2016, and 2020 - every four years.
In 2009, a successful Bitcoin miner could claim a prize of 50 BTC. After this year’s halving, they will only get 3.125 BTC. However, keep in mind that Bitcoin prices are far higher now than they were in 2009, so this isn’t necessarily a loss for the miner.
As of February 14, the price of 1 BTC was around $49,528. This means a mining reward on February 14 would be worth around $3,09,550 (6.25 x price of 1 BTC). Whether this value will rise or fall after the Bitcoin Halving depends on the price of Bitcoin.
Both corporate and independent Bitcoin miners are spread across the world, trying to leverage cheap electricity prices in countries like Kazakhstan and Iran to mine as much Bitcoin as they can. China was originally home to many of the world’s crypto miners, but government crackdowns triggered an exodus to other countries.
What impact will the 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, a corporate-level miner who has burned through their wallet paying for Bitcoin mining hardware (and the electricity bills that come from powering them) is probably desperate to earn their block reward in these last days while it 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 sum of money in Bitcoin through their crypto exchange via a phone app and knows nothing about the underlying blockchain technology might not even react to the news of the halving.
Meanwhile, a more experienced trader who has looked at past halvings might try increasing their Bitcoin investment in the hope of benefiting from a possible price spike, even as another might “short” Bitcoin while hoping to profit from a possible price crash.
What will happen to the crypto market after the next Bitcoin Halving?
The short answer: almost nobody knows.
The long answer: innumerable self-styled crypto traders, financial analysts, fintech engineers, crypto influencers, and statisticians claim they can predict the price trajectory of Bitcoin with the help of cryptocurrency models and metrics, but investors should know these are all educated guesses at best.
Many Bitcoin investors and watchers also reference a recurring 4-year cycle that hinges on the halvings, or even claim that prices spike after the halvings. But in reality, the coin’s journey has been far more unpredictable and difficult to map out.
Every halving in Bitcoin’s history has been wildly different due to an eclectic mix of blockchain-related factors, increasing regulation by lawmakers worldwide, more awareness about cryptocurrency investments, greater adoption of Bitcoin, and diverse geopolitical events or economic shocks. Bitcoin is an asset whose price is largely steered by investors’ emotions, with there even being a ‘Fear and Greed’ indicator to help investors understand how prices could suddenly shift.
While the next Bitcoin halving will be a fascinating episode to witness, it is best for crypto watchers to rely on their own research and decide what the halving means to them personally.
Published - February 24, 2024 11:32 am IST
