Bitcoin halving is just weeks away - what does it mean?

Author: Thomas Carreras, DLNews Translation: Shan Ouba, Golden Finance

Abstract

• It is expected that the Bitcoin halving will occur on April 20, and the Bitcoin issuance will be reduced by half.

• The halving may push up prices, but it may also create challenges for Bitcoin miners.

In the world of cryptocurrency, few events are as highly anticipated as the Bitcoin halving.

This process of halving, which occurs roughly every four years, plays a fundamental role in the top cryptocurrency’s raison d’être — it enables the pseudonym of Bitcoin Creator Satoshi Nakamoto’s plan to gradually reduce the supply of new coins.

This is why market participants love halvings: because Bitcoin miners no longer earn as many Bitcoins, they can't sell the same amount as before Bitcoin. With fewer Bitcoins for sale, the price of Bitcoin will naturally increase if demand remains the same or increases.

The impact on the supply side could be huge. Bitcoin gained approximately 2,330% in the 5 months after the first halving in November 2012 and 2,876% in the 5 months after the July 2016 halving. The third halving in May 2020 had a smaller impact, but Bitcoin still surged 611% in 11 months.

The fourth halving may occur on April 20, which is expected to have a significant impact on Bitcoin miners and the cryptocurrencies they rely on.

Having mechanism

Every time a network participant adds a new block to the blockchain , new Bitcoins will be generated, approximately every 10 minutes.

This is called mining, and it is not a simple process. Miners consume large amounts of computing power and electricity in order to produce the next block of Bitcoin before their competitors, thereby receiving Bitcoin rewards and transaction fees.

But for philosophical and economic reasons, Satoshi Nakamoto wanted Bitcoin to have a fixed supply. Therefore, they set a hard limit on the number of Bitcoins that exist – 21 million.

Halving is a mechanism that ensures that the supply of Bitcoin is reduced over time until it reaches Satoshi Nakamoto’s goal. The first halving slashed the Bitcoin block reward from 50 BTC to 25 BTC, the second halving to 12.5 BTC, and the third halving to 6.25 BTC. The fourth halving will reduce miner rewards to 3.125 Bitcoins, which is worth approximately $178,000 at current prices.

The process should continue like this until 2140, when miners will be rewarded only with network transaction fees.

Impact on Bitcoin

In most cases, Bitcoin miners sell They earn Bitcoin to cover operating costs. Therefore, miners have been the source of selling pressure on Bitcoin throughout its history.

Because the halving reduces the number of Bitcoins earned by miners in half, it also limits the number of Bitcoins they can sell. The past three halvings have been characterized by significant reductions in Bitcoin sales, which in turn has pushed Bitcoin's price to all-time highs.

However, it is worth noting that miners have less influence on Bitcoin prices than before. There are currently 19.6 million Bitcoins in circulation, whereas in 2012 and 2016, when the first two halvings occurred, the circulating supply of Bitcoin was approximately 10 million and 15.7 million Bitcoins, respectively.

This means that the number of Bitcoins sold by miners on the market accounts for an increasingly smaller proportion of the circulating supply of Bitcoin.

So, while previous halvings have pushed Bitcoin’s price to new heights, there’s no guarantee that the upcoming halving will do the same.

Challenges faced by miners

Since Bitcoin miners often rely on Bitcoin rewards as their main income source, so halving can and often does cut their income in half.

The problem for miners is that their operating costs remain the same. If a mining operation isn't efficient enough - for example, if it has expensive power contracts with energy suppliers - it could go bankrupt.

The challenges brought by this round of halving are particularly severe. The mining industry is becoming increasingly competitive, making it increasingly difficult to make a profit even under normal circumstances.

Therefore, the fourth halving is expected to put tremendous pressure on medium-sized and independent mining companies that cannot efficiently raise funds through the financial market.

Marathon Digital Holdings, the largest listed Bitcoin mining company in the United States, recently told DL News that as the halving approaches, the company is actively "looking around for acquisition sites." .