If you are a cryptocurrencies enthusiast, by now you have probably heard of or read something about the upcoming ‘Bitcoin Halving’ in May 2020. Like many, perhaps you are wondering what this is all about.
This article will provide a simple explanation of what it is and the impact of the halving on the cryptocurrencies market as a whole.
But before we delve into it, it is import to understand how bitcoins are produced in the first place. Bitcoins are ‘mined’.
This simply means they are generated by ‘miners’. Mining simply refers to the process of verifying transactions through cryptography (resolving complex algorithms) in the bitcoin network and recording them in a public ledger called the blockchain.
The transactions are recorded in blocks which are linked/chained to the previous blocks, hence the term blockchain. The people who verify these transactions and record them in the blockchain are referred to as miners.
When these miners correctly verify and record transactions in the blockchain, they are rewarded with bitcoins. And each block produces a fixed number of bitcoins. So the bitcoins rewards/new bitcoins are issued every 10 minutes and this number has been fixed but reduces every four years.
When bitcoin was created in 2009, the number bitcoin rewards/ new bitcoins every 10 minutes was 50 bitcoins (BTC).
The first halving event happened in November 2016 and this reduced the bitcoin rewards from 50 BTC every 10 minutes to 25 BTC every 10 minutes.
The second halving event happened about 4 years later, September 2016. The bitcoin rewards were reduced by half from 25 BTC to 12.5 BTC every 10 minutes.
The third halving event is set to happen in May 2020, further reducing the bitcoin rewards from 12.5 BTC every 10 minutes to 6.25 BTC every 10 minutes.
After the May 2020 halving, the next is set to be in 2024 when the rewards will be reduced from 6.25 BTC to 3.125 BTC every 10 minutes.
The total available bitcoins can only be 21 million. At the time of writing this article, slightly more than 18.3 million had been mined since its creation in 2009 and were in circulation.
This means the rate at which new bitcoins are created has slowed down over the years.
see current crypto prices below
What is the impact of bitcoin halving?
A reduction in the supply of new bitcoins, therefore, has an impact on the cryptocurrencies market.
Since there are only 18.3 million bitcoins in circulation at the moment, the supply has slowed down due to the reduction in bitcoin rewards every 4 years.
As the years go by, this is set to slow down the supply even further.
Since 2009, Bitcoin has gained popularity. It is no longer individual enthusiasts using it to buy pizza.
Even institutional investors have shown interest in not just Bitcoin, but also other cryptocurrencies ( popularly known as Altcoins), for example, Ethereum, Bitcoin Cash, Ripple etc.
Bitcoin has become a payment gateway, for some merchants. It has also become a base currency for almost all the Altcoins, especially in cryptocurrency exchanges where it is paired with other Altcoins.
But looking at the popularity of bitcoin which has grown over the years, the limited supply can lead to a number of scenarios:
1. The price of bitcoin itself can go up. Looking at the past halving charts, this is likely to happen over the next months or years leading up to the next halving event.
For example, during the 2016 halving, the price moved from over $600 to an all-time high of $20,000 before coming down in 2018.
But one thing is for sure, though the price came down, it did not go below the pre-2016 price.
2. The movement in the price of Bitcoin affects the prices most of the Altcoins since it is the base currency.
Most of these Altcoins also go up in value during this period.
3. Because of the increase in price, the market capitalization of the cryptocurrency market also hits a record high.
This is expected to be the case beginning in May 2020.
The list of impacts is by no means exhaustive, especially in the face of turmoils in the Global financial markets caused by the impact of the Covid-19 pandemic.
Everywhere in the world, the financial markets have all but crashed.
Prices of stocks and commodities have plummeted. Even oil prices have not been spared, leaving the major oil producers reeling from the effects of low or no demand at all.
Yet the cryptocurrencies market still seems to be thriving. Could cryptocurrencies be a safe haven for investment? And can one ride on the impact of the impending halving event of May 2020 just like some have done in the past halving events?
The jury is out there.
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