Crypto Halving - What Does it Mean?
Crypto halving, in simple words, refers to the event where the reward for mining a cryptocurrency is cut down by 50%. The event plays a significant role in the sustainability of several cryptocurrencies including Bitcoin.
You’re probably wondering why it is necessary; the simple answer is supply and demand. When the supply of rewards on crypto mining is cut to half, it increases demand. This allows a cryptocurrency to avoid inflation and maintain its value. To understand cryptocurrency halving thoroughly, it’s essential to first understand how a cryptocurrency network operates.
How does a cryptocurrency network operate?
Let’s start with how does cryptocurrency work. Most cryptocurrencies use an underlying technology known as blockchain in order to operate. A block is a file that consists of data pertaining to the currency’s network. So, each time a cryptocurrency is mined, it is added to the blockchain. Each node containing the history of a cryptocurrency’s transactions is responsible for approving or rejecting a transaction through a series of checks.
As computers or nodes are added to the blockchain, the cryptocurrency becomes more stable and secure. Though for a transaction to occur, all parties operating in the cryptocurrency’s network must approve the block in which the transaction is taking place.
In simpler words, a blockchain provides a record of all transactions made in a network, including. This doesn’t mean a transaction can be tracked down; the party who has made the transaction remains anonymous. However, anyone can view the transactions through block explorers.
- Most cryptocurrencies use blockchain technology to record all transactions happening in a network.
- The blockchain system is difficult or impossible to hack, change, or cheat. Hence, it makes a cryptocurrency secure and stable.
- A blockchain is duplicated and spread across each computer on the network. As the blockchain changes, the computers update to reflect that change.
- Blockchain technology is decentralized, distributed, and primarily public.
The significance of crypto halving explained
If a cryptocurrency were infinite, it would become subject to inflation and lose its value in no time. To maintain a currency’s value and attractive for cryptocurrency investment, it must be stable and scarce. This is why Bitcoin is built around a controlled supply of only 21 million bitcoins in total, and Bitcoin halving occurs. Similarly, most cryptocurrencies go through cryptocurrency halving, so the supply of available crypto coins becomes smaller, and thus their value increases.
This also acts as an incentive for miners. If the value of a cryptocurrency were stagnant or declining, miners would eventually lose the will to put in all the effort it takes towards mining. However, the crypto halving event causes fluctuations in a digital currency’s price and often increases value.
According to Sergei Kithrov, the founder and CEO at listings, ‘coin desk analysts pointed out a surge in cryptocurrency trading volumes a month before and a month after each halving.’ It makes sense because the chance to profit from crypto coins after the halving is much higher; hence people are more attracted to investing in cryptocurrencies during that period.
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Implications of crypto halving
Decreased rewards on crypto mining
The primary impact of crypto halving is that the effort and computational power needed to mine a crypto coin is doubled due to decreased supply. For instance, if a Bitcoin miner received 12.5 BTC per block, his reward for mining is now 6.25 BTC per block after halving took place. Until sometime during 2024, a Bitcoin miner will receive 6.25 BTC per block, followed by a halving event that will drop the reward to 3.125 BTC per block. This will continue until 2140 when the last Bitcoin will be mined.
Fluctuations in cryptocurrency values
The after-effects of crypto halving on the crypto coins’ value are immense. For instance, Bitcoin’s value went from 11 USD up to over 1000 USD in 2013, followed by the crypto halving event in 2012.
Albeit halving causes fluctuations in a cryptocurrency’s price, Bitcoin’s value also saw a decline of a few hundred dollars following its sudden increase in value. The fall in price was recovered during the halving event in 2016, which resulted in Bitcoin being valued at over 20’000 USD by 2017. The price then continued to fall to 3200$. However, it was only 650$ before the halving.
Increased energy costs for mining
According to the University of Cambridge’s Bitcoin electricity consumption index, it is expected that Bitcoin miners will consume approximately 130 terawatt-hours of energy. This means the electricity expected to be consumed by miners is roughly 0.6% of our global electricity consumption.
As Bitcoin halving takes place, it becomes more time and energy-consuming to mine a Bitcoin. This results in a much higher electricity cost for miners. Currently, a single Bitcoin takes 707.6 kilowatt-hours of electrical energy, which is equal to the power consumed by an average American household over 24 days.
What will happen after the next halving takes place?
If we analyze the previous effects of cryptocurrency halving, we can assume that crypto coins’ value might significantly increase during the next crypto halving event. However, one cannot predict precisely what will happen.
Similarly, when we analyze the previous Bitcoin halving events, we can see that Bitcoins value increased each time massively. More importantly, even when the price fluctuated, it did not go below its price before halving occurred.
The likelihood of history repeating itself is pretty high as cryptocurrencies, especially Bitcoin, have seen an exponential rise in value ever since they began existing. The halving event and Bitcoin’s algorithm is designed to make the cryptocurrency sustainable and stable.
How to exchange Bitcoin before or after crypto halving?
Analyzing the previous implications of crypto halving, it’s no shock that the event has attracted many people to buy cryptocurrency, especially Bitcoin. Trading Bitcoin is just like exchanging stocks; when Bitcoin’s price is expected to increase, investors instantly try to invest in it. Similarly, once crypto traders see that Bitcoin’s cost has risen, they’ll try to sell it off and make a profit.
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- Our crypto-exchange is intended to be suitable for beginners and crypto experts alike.
- We make Bitcoin transactions seamless.
- We offer users valuable insights through our guides, live crypto charts and the latest crypto news.
- We allow users to exchange Bitcoin with 0% cryptocurrency transaction fees.
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Final thoughts on crypto halving
After shining light on crypto halving and its implications, it’s safe to say that the event is necessary for maintaining a cryptocurrency’s value. Be it a cryptocurrency or a physical currency, inflation can devalue both. Any infinite currency cannot be sustainable.
Nobody can know the exact effects of crypto halving in the future. Still, after studying the previous halving events, it’s predictable that cryptocurrencies’ value might see a rapid increase due to reduced supply during the next halving event.
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Crypto Halving FAQ
Bitcoin halving is expected to take place roughly every four years until the last Bitcoin is mined. The previous halving event took place on the 18th of May, 2020. The event decreased the reward on mining Bitcoin by 50%, from 12.5 BTC to 6.25 BTC.
Each time Bitcoin halving has occurred, the value of Bitcoin has skyrocketed. It makes sense because decreasing the supply of the cryptocurrency leads to increased demand and hence higher value. However, the price continues to fluctuate. Albeit the price does not fall below the value of Bitcoin before the halving took place.
The effort that is going into mining Bitcoin doubles as well, making it more valuable. Similarly, crypto halving makes cryptocurrencies stable and sustainable, making them even more attractive to investors.
The total Bitcoins that can be mined altogether are 21 million. Once 21 million Bitcoins have been mined, the supply for Bitcoin will have been exhausted. The limited number of Bitcoins makes cryptocurrency scarce. Afterwards, miners can earn through transaction fees from every transaction.