The corona lockdown has severely hit economies and brought many businesses to a standstill. However, the cryptocurrency markets are quite immune to the outbreak. The bitcoin halving that happens approximately every four years went as usual, in 2020 as well. #Bitcoinhalving was trending worldwide on 11th May 2020. What kind of impact will the halving have in the crypto realm and beyond? We are going to discuss what to expect during pre and post halving scenarios.
What is Bitcoin halving?
Bitcoin halving refers to the reduction in bitcoin block rewards by 50%. These rewards are issued to miners who provide their computer processing power to validate bitcoin transactions. The block reward for miners was 12.5 newly minted Bitcoin before the recent bitcoin halving occurred. However, post halving, miners will get only 6.25 bitcoin per validated block. Thanks to reduced mining rewards, the total supply of bitcoin stay in control. Theoretically, the inflation quotient of Bitcoin keeps dropping till it gets to zero after umpteen bitcoin halvings. In simple words, bitcoin halving confirms to the deflationary model of bitcoin.
Previous occurrences of bitcoin halving:
Halving is programmed to occur after the creation of every 210,000 blocks. In the current scenario, it takes about 10 minutes for a new block of transactions to be completed. Going by simple math, halving happens every 4 years. This is the third bitcoin halving in the decade long stint of the cryptocurrency. When Bitcoin was first developed in 2009, miners got 50 BTC per validated block. The block reward came down to 25 BTC during the first halving in 2012 and, to 12.5 BTC during the second halving in 2016. Similarly, after the third halving on 11th May 2020, the block reward issued to miners has come down to 6.25 BTC.
Understanding the deflationary bitcoin model:
The inflation of BTC means a decrease in the purchasing power of each bitcoin. The limited supply of coins ensures the purchasing power of Bitcoin won’t go down. It is very similar to the deflationary model of gold. With each halving, we should witness deflation, at least on paper. Just over 18 million bitcoins are in circulation, out of the total supply of 21 million bitcoin. As per predictions, the last bitcoin will be mined in 2140. At the current rate, 1800 Bitcoins are minted daily, account for an inflation rate of 3.8% annually. With further halving, annual inflation should decrease, at least in theory.
How the third halving will impact bitcoin pricing?
Bitcoin algorithm imposes a limited supply of coins, thereby making bitcoin scarcer than gold. Hence the price of bitcoin will experience positive long term effects. Besides, several other events trigger a sudden rise in bitcoin prices. However, it cannot be attributed clearly to bitcoin halving. For 12-15 months, there was no spike in bitcoin prices after the first and second halving. After the 15 months, bitcoin pricing saw all-time highs in both first and second halving. However, the spike to $20k per bitcoin was mostly because of market manipulation, as media was promoting Bitcoin like crazy. Thereby, as per precedents, bitcoin price is not going to change drastically on account of the recent bitcoin halving in short term but in the long term scenario, we can assume that low miner’s reward will reduce supply in the market causing bullish impact.