Bitcoin Halving: How It Affects Miners, Investors, and Ecosystem
Three scenarios
Once every four years, the cryptocurrency world focuses on a phenomenon that plays a crucial role in shaping the future of bitcoin and potentially the entire digital currency ecosystem. This phenomenon, known as bitcoin halving, is a planned event in the bitcoin blockchain code that results in a 50% reduction in mining rewards. The next halving is expected in April 2024, which has the potential for significant changes in the market. Kyrylo Khomiakov, General Manager of Binance in CEE and Central Asia, told Mind how the upcoming halving could affect the cryptocurrency world, and what its potential consequences could be for miners, investors, and the entire cryptocurrency ecosystem.
Read also: After Record: Bitcoin Investors Expect Significant Price Growth
Bitcoin halving: from the origins to the rise of digital gold
Bitcoin halving is a fundamental mechanism built into this cryptocurrency's core, ensuring its deflationary nature and limited supply. This system was introduced in the early days of bitcoin in 2008 when Satoshi Nakamoto published his famous white paper proposing to create a decentralized currency independent of governments or central banks.
Bitcoin has typically shown a significant increase in value over the six months following each halving event. These price fluctuations highlight the market's response to a decrease in the new BTC supply while increasing demand, which often drives the cryptocurrency value up.
While past performance is not an indicator of future results, these historical trends provide insight into the potential impact of halving events on bitcoin price dynamics. However, whether there is room for further price growth depends on the overall market environment, the adoption rate, and other relevant factors during the halving event. For example, the recent approval of ETFs for spot bitcoin has increased demand and expanded its reach. The new ETFs have already attracted billions of dollars in investment.
In the early days of the network, miners who used their computing power to maintain the network and verify transactions were rewarded 50 bitcoins for each block they found. This generative process facilitated the rapid proliferation of coins, with 10.5 million bitcoins mined in the first four years. However, to avoid hyperinflation and to preserve the limited supply of 21 million bitcoins, it was decided to reduce the reward per block by 50% every 210,000 blocks.
The first halving was on November 28, 2012, when the reward per block was reduced from 50 to 25 bitcoins. This historic moment not only decreased the flow of new coins into the market but also showed Nakamoto's prudent approach to the long-term sustainability of bitcoin. The second halving, which occurred on July 9, 2016, reduced the reward to 12.5 bitcoins per block, following the tradition of limiting supply and maintaining interest in mining.
These halvings were not only special technical events on the network but also important moments for the crypto community, demonstrating the ecosystem's growth and maturity. They spurred discussions about the bitcoin's future, value, and impact on the cryptocurrency market in general.
In the context of the fourth halving in 2024, considering historical experience and understanding how these regular events shape the perception and value of bitcoin is crucial.
The upcoming halving is unique since it is taking place against the backdrop of several other significant events in the entire crypto ecosystem. In addition to the ETF breakthrough, which has sparked institutional interest and adoption, another important trend in cryptocurrencies today is the boom in layer 1 and layer 2 blockchains and DeFi activity on the bitcoin network, fueled by the popularity of the Ordinals protocol and bitcoin inscriptions.
From the "death spiral" to the "bull season"
When analyzing the upcoming bitcoin halving with a cautious perspective, one should consider several possible scenarios to unfold as a result of this event. From the mining "death spiral", which, although the least likely, leads to a massive sale of bitcoins by miners and a possible network collapse, to less dramatic but unpleasant scenarios, such as a slowdown in network growth and a decrease in hash rate. However, past events have shown that bitcoin has excellent resilience and recovery, making a death spiral scenario unlikely.
The key is having faith in the stability and immutability of bitcoin as a decentralized, censorship-resistant, borderless currency that only strengthens its fundamental characteristics with improved access to renewable energy and internet infrastructure. Regardless of which scenario is the most accurate, the upcoming halving highlights bitcoin strength and importance to the future of digital finance.
A less dramatic "painful scenario" involves a slowdown in network growth resulting from a decrease in miner rewards. This may encourage less efficient miners to leave the network, causing the hash rate to slow down. However, the adaptation of stronger mining pools and large mining companies can smooth this transition, ensuring network stability. More optimistic scenarios include the network moving forward steadily without major shocks, maintaining an overall upward trend as it did after the previous halving events. Such moments testify to the strength of bitcoin's fundamental principles and long-term growth potential.
The "realistic scenario" assumes that the halving will have minimal shocks, as was the case with the previous ones. While there may be short-term fluctuations in price and hash rate, the overall network direction and bitcoin value growth will remain stable. History shows that each halving has contributed to the price and hash rate growth, confirming the viability of bitcoin's fundamental principles.
The most optimistic "winning scenario" predicts the beginning of a "bull season" when new investment inflows and growing interest in bitcoin will cause a significant price increase. This will increase the hash rate and strengthen bitcoin's position in the market.
What is Halving Horizons?
Halving Horizons is an initiative aimed at highlighting the potential transformative impact of bitcoin halving. The campaign aims to engage the community in considering the opportunities and ideas that halving presents. It focuses on exploring the impact of halving not only on mining but also on the overall development of the cryptocurrency ecosystem.
The campaign includes various activities and educational materials, from games that help expand knowledge about cryptocurrencies to trading competitions where participants can test their skills in the market. Each activity is designed to deepen understanding of the crypto economy and identify new opportunities offered by bitcoin.
The initiative considers halving as a moment to reflect on the growth and future of cryptocurrencies. The goal is to make this future accessible and useful to a wide audience, from newcomers to the world of cryptocurrencies to experienced market players.
While everyone is optimistic about the future of bitcoin and the crypto market in general, it is important that investors, especially those new to the crypto market, have realistic expectations.
Instant price fluctuations after a halving are not guaranteed, and its fundamental significance will be manifested in the long-term trends in value, liquidity, adoption, position, and acceptance of cryptocurrencies as an asset class. In addition to the bitcoin price, halving can have long-term favorable effects on the broader ecosystem, benefiting other assets and projects by stimulating infrastructure development and product innovation in this field.
The OpenMind authors, as a rule, are invited experts and contributors who prepare the material on request of our editors. Yet, their point of view may not coincide with that of the Mind editorial team.
However, the team is responsible for the accuracy and relevance of the opinion expressed, specifically, for fact-checking the statements and initial verification of the author.
Mind also thoroughly selects the topics and columns that can be published in the OpenMind section and processes them in line with the editorial standards.
