The first thing you should know about Bitcoin halving is that it has much influence on valuation as it doesn’t. It often precedes a “bullish” surge in the Bitcoin market; however, analysis shows that certain conditions must be in place to effect such a price surge.
To fully grasp the idea behind Bitcoin valuation, one would need first to understand all the mechanics that come to play, either in mining or transacting. While the flow of investment, the world economy, and mining activities contribute to the valuation of Bitcoin, the coin itself has a strategy which it uses to deplete its circulation, which drastically reduces the supply without tampering with the demand volume. This circulation reduction strategy is known as “Bitcoin Halving.”
Bitcoin runs on servers programmed into a blockchain. The blockchain serves as a ledger for recording transactions on the Bitcoin server. Individual programmers called “miners” build the blockchain blocks; they are then rewarded with Bitcoin. However, after the mining of every batch of 210,000 blocks, approximately every four years, the rewards are halved compared to the next completion. The idea is that a reduced supply would induce inflation in the market and add value to the cryptocurrency asset. Theoretically, miners lose half of their rewards, but so does the market too. If miners put up 25 Bitcoins for sale every ten minutes (i.e., the time it takes to build one block and get rewarded), and the reward was halved, the market would see the supply of Bitcoin reduce, with real-time investors bidding higher than before to get the available coins. This leaves a situation where the mining rewards are halved, but the demand and supply principle ensures that the miner’s revenue rarely drops.
Essentially, what Bitcoin halving does is to reduce the supply of the coin and at the same time, ensure that the value of the coin remains as high as always.
What is the Significance of Bitcoin Halving?
Bitcoin has a total fixed supply of 21 million units of the asset; presently, there are over 18 million units of the coin in circulation, which means the virtual asset is being mined massively but this somehow wouldn’t affect the valuation of the asset. Bitcoin halving reduces the amount of the cryptocurrency being pushed for circulation which ensures the scarcity of the coin and in return it helps to retain the financial relevance and investment viability of BTC as the circulation flow drops.
The past three halving exercises prove the spike or economic “adrenaline” rush that follows halving events. Supply dropped by half; price increased over twice the previous value and more investors flooded the asset, which follows every bullish trend.
Several other variables must be in place for halving to effectively result in a price surge. Demand and Market Standings are some of these variables. The same way a 5kg gold piece would go for more money than a finely plated silver amount of the same weight is how Bitcoin dwarfs other crypto options in the market largely due to its popularity and the fact that it has become a viable store of value.
If the halving method doesn’t signal a new value peak, as an incentive for mining, the tasks, and operations required to complete a block are designed to become relatively more comfortable than before the halving. Hence, time is used as compensation for monetary value; if tasks are more manageable, they become faster to complete, and miners can mine more blocks in a shorter time.
What Happens When Bitcoin Halving is Completed?
Eventually, all Bitcoin would be mined and there would not witness any halving again. So, what happens when this situation comes to be?
Rationally, the most likely occurrence would be the Bitcoin market’s fall, on the final halving event, which leaves miners with no rewards for mining blocks. However, Satoshi wrote in the original Bitcoin “white paper” of the steps to incentivize miners after the final halving.
While it is possible that Bitcoin would be outrageously pricey by the last halving, miners would get no share of that since there wouldn’t be anymore Bitcoins to be put in circulation. However, Satoshi states that after the final and 64th Bitcoin halving, miners would be paid to verify and validate the block’s transactions. Instead of Bitcoin rewards, miners would be paid from transaction fees to incentivize them to continue processing the blockchain in order for operations to continue.