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You may have heard of something called a Bitcoin ‘halving’ occurring this year. In May 2020, Bitcoin went through its third halving, and its reward value dropped from 12.5 to 6.25 BTC per block mined. This essentially means that the reward for mining a block was cut in half yet again.
But how does this work?
In a centralized economy, the central bank is responsible for controlling the supply of money. However, in the case of cryptocurrencies like Bitcoin, there is no such centralized authority to control its monetary base. This necessitates that Bitcoin as a cryptocurrency must have its own mechanism to ensure a controlled supply.
This is where the concept of Bitcoin halving (or ‘halvening’) comes in. After every 210,000 blocks that are mined, the reward awarded to miners for every block gets halved. As a result, new bitcoins are released into circulation at only half the rate as compared to before that. (This is distinct from a coin burn – a mechanism that other cryptocurrencies apply to manage inflation)
Therefore, this controlled release of bitcoins helps maintain a synthetic form of Bitcoin inflation. This halving would continue till all the bitcoins have entered circulation, and after that, miners would be rewarded with the fee that network users will pay for processing transactions.
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Why is Bitcoin Halving Important for Cryptocurrency Investors?
Is there any significance of this phenomenon for cryptocurrency investors? This is easier to understand when we notice the patterns that are set off by a halving event. When a halving occurs, bitcoins’ supply decreases, and the consequent higher demand leads to a rise in Bitcoin prices. And quite clearly, Bitcoin halvings in the past have resulted in a dramatic rise in Bitcoin prices, only to drop later. Let’s have a look.
- The First Halving
In November 2012, the first Bitcoin halving took place, halving the reward for mining from 50 to 25 BTC. The consequent effect on the prices saw a surge of about 8000% in the year that followed.
- The Second Halving
The second such event occurred in July 2016 when the reward was halved from 25 to 12.5 BTC, and as a result, Bitcoin prices surged by nearly 1000%.
- The Third Halving
The events of May 2020 have again led to an all-time high in Bitcoin prices, nearly reaching $20,000 in November 2020.
Therefore, crypto investors can make use of this knowledge in various ways. Understanding the market fluctuations – price rise followed by a drop – is important for anyone who intends to make gains from these market movements. At the same time, it is also important to understand the effects of other global situations, such as the ongoing pandemic, to figure out whether all halvings will necessarily result in similar price movements.
For bitcoin miners, understanding the halving of the mining reward with respect to increasing value is essential. For example, if the third halving was expected to reduce the Bitcoin inflation rate from 3.6% to 1.8%, then these changes are relevant to how the gains would be calculated. The operational costs of mining, such as hardware, electricity, etc., are estimated at $6,851 by Bitcoin.com. This corresponds to a 30% margin because 70% of the block rewards would have to be sold to cover the operational costs. So if the halvings push up the Bitcoin price but not by much, then it is not a great investment for miners (while being great for investors).
For new investors, Bitcoin halving presents a great opportunity to understand the cryptocurrency domain and begin making investments.
Conclusion
Crypto investors, particularly those holding Bitcoins for sufficient duration to make gains, can benefit greatly from such halvings. For a volatile asset, such a pattern that has occurred thrice so far seems fairly consistent.
With the next halving expected in another 4 years, it remains to be seen whether the price-boost pattern is set in stone or simply happens to coincide with other market forces.
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Frequently Asked Questions
How Does Bitcoin Work?
The blockchain, a distributed digital ledger, is what Bitcoin is based on. As the name suggests, blockchain is a linked database made up of blocks that store information about each transaction, such as the date and time, total amount, buyer and seller, and a unique identifier for each exchange. Entries are linked in chronological order to form a digital blockchain. Entries are linked in chronological order to form a digital blockchain. Blockchain is decentralized, which means any central authority does not control it.
Is Mining Cryptocurrency Legal?
Cryptocurrency mining can be time-consuming, expensive, and sporadically profitable. Mining has an appeal for many cryptocurrency enthusiasts as miners are paid directly with crypto tokens for their efforts. The legality of cryptocurrency mining is dependent on where you live. In India, there is no restriction on crypto mining.
How To Invest In Cryptocurrency Stocks?
Cryptocurrency can be purchased in two ways: through mining or exchanges. The process of confirming and adding transactions to the blockchain public ledger is known as cryptocurrency mining. Cryptocurrency exchanges are another option. Exchanges make money by charging transaction fees, but there are alternative platforms where you may communicate directly with other cryptocurrency traders.
Is Cryptocurrency Safe To Invest In?
Cryptocurrency investments are subject to market risks, but if sufficient security measures are not taken, trading accounts can be maliciously accessed. Investments come with risks and uncertainties, and we cannot claim that any digital currency investment is risk-free. Buying and selling cryptocurrencies can be risky even if the trader is knowledgeable about the market and treats their coins carefully.
Is Cryptocurrency Legal In India?
In India, cryptocurrencies are legal; anyone can purchase, sell, and trade cryptocurrencies. They are currently unregulated; India does not have a regulatory framework in place to regulate its functioning. According to the Ministry of Corporate Affairs (MCA), companies must now declare their crypto trading/investments during the financial year, according to the Ministry of Corporate Affairs (MCA). Cryptocurrency transactions have been taxable in India when people receiving such gains are Indian tax residents or where the crypto is considered to be domiciled in India
How To Invest In Cryptocurrency?
There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is considered the procedure of verifying and adding transactions to the blockchain public ledger. Another option is via cryptocurrency exchanges. Exchanges generate money by collecting transaction fees, but there are alternative websites where you can interact directly with other users who want to trade cryptocurrencies.
How To Create Bitcoin Account?
Firstly, Go to the WazirX website and sign up. Then, a verification mail will be sent to you. The link sent via verification mail would be available only for a few seconds so make sure you click on the link sent to you as soon as possible, and it will verify your email address successfully. The next step is to set up security, so select the most suitable option for you. After you have set up the security, you will get a choice to either proceed further with or without completing the KYC procedure. After that, you will be directed to the Funds and Transfer page, where you could start depositing Bitcoins to your wallet. You can also deposit INR and then use it to buy Bitcoin for your WazirX Bitcoin wallet.
Is Bitcoin Legal In India?
In India, Bitcoin is not illegal. Because of cryptocurrency's rapid evolution, policymakers and regulators seemed to have recognized the chance to accept the new technology early. From the infamous 'RBI ban' in 2018 to reports of an impending bill banning cryptos in 2021 that has yet to develop, India has seen its fair share of ups and downs when it comes to Bitcoin regulation. Last year, the Supreme Court Of India approved the use of Bitcoin throughout the country. According to the Supreme Court, the existence of Bitcoin or any other cryptocurrency is unregulated but not unlawful.
How Cryptocurrency Works?
Cryptocurrencies use cryptography technology to keep transactions and their units (tokens) secure. Cryptocurrency works via a technology called the blockchain. A blockchain is a decentralized technology that handles and records transactions across numerous computers. The security of this technology is part of its value.
Can I Invest In Cryptocurrency?
Yes, with exchanges like WazirX, you may invest in cryptocurrency in India. To begin, go to the WazirX website and register. After that, you will receive a verification email. The link received by verification mail will only be available for a few seconds, so make sure you click it as quickly as possible. This will successfully verify your email address. The following step is to set up security, so choose the best solution for you. After you've set up the security, you'll be given the option of continuing with or without completing the KYC process.
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