The uncontrolled issuance of any currency leads to its depreciation. The issuance of fiat currencies is controlled by states. The news is overflowing with information about the consequences of this 'control'. Inflation grows, money devalues, uncontrolled emission leads to economic and social problems.
Bitcoin, unlike fiat currencies, has a mechanism to protect against uncontrolled emission and the resulting inflation.
WHAT IS HALVING
Bitcoin's creator, Satoshi Nakomoto, introduced the process of halving into the bitcoin algorithm.
Halving is the process of halving the miners' reward for each block mined. In the bitcoin algorithm, halving occurs after mining 210,000 blocks, or about once every four years. The halving process will be repeated until bitcoin issuance ends in 2140.
The regular decrease in the mining reward sets the pace of bitcoin issuance and protects the digital currency from inflation.
Over time, bitcoin issuance decreases, the difficulty of mining increases, the demand for bitcoin increases as the cryptocurrency becomes more popular, and the price of bitcoin increases accordingly.
In this way, bitcoin is similar to gold. With every gram of gold mined, its reserves on Earth dwindle and gold becomes more difficult to mine. For centuries, gold has served as an international medium of exchange and savings. The cryptocurrency community considers bitcoin a digital substitute for gold.
HOW MANY TIMES HAS HALVING BEEN CONDUCTED
As of October 2020, there have been three bitcoin halvings.
The first halving took place on 28 November 2012 at 210,000 blocks. This halving did not cause a stir and was only of interest to a narrow circle of specialists. The second halving took place on 9 July 2016. Then block #420000 was mined by the Chinese mining pool F2Pool. The mining fee was reduced from 50 BTC per block to 25 BTC.
Before the second halving, experts and analysts predicted an imminent rise in bitcoin as the cryptocurrency grew in popularity and mining rates declined. Their predictions proved to be correct. Bitcoin went up and reached $20,000 per BTC by December 2017.
The rise was followed by a fall. By the third halving, bitcoin was above $8,500 per BTC. The third halving took place on 11 May 2020 at a block of 630,000. The reward for mining is now 6.25 BTC.
Experts suggested three models of bitcoin exchange rate behaviour after the third halving. Some thought the bitcoin rate would rise, others promised a fall in the rate, while others said the halving would not have a significant impact on the rate and that the bitcoin price would not change much.
HALVING'S IMPACT ON MINERS AND MINING
By 2140, when miners get all the blocks, the last halving will have taken place. After that, miners will earn money from servicing transactions on the bitcoin network. Until then, the mining rewards will be halved roughly every four years.
The reduction in the reward for mining leads to some miners being able to refuse to mine new blocks on the Bitcoin network. The abandonment of some miners will not affect the frequency of mining new blocks or the time intervals between blocks. As the hash rate of the network decreases, the complexity of mining will decrease, allowing the remaining miners to keep the bitcoin blockchain running by the algorithm's requirements.
The mining complexity of the bitcoin network is recalculated after each 2016 block is mined. It should take about 10 minutes to mine one block. It should take two weeks to mine 2016 blocks. The difficulty of mining will increase if 2016 blocks are mined in less than two weeks, if it takes longer to mine 2016 blocks, the difficulty of mining will decrease.
After the second halving, the cryptocommunity actively discussed the possibility of a "death spiral" for bitcoin.
A "death spiral" was understood to be a situation where miners stop working with the bitcoin network due to a decrease in the economic efficiency of mining, the hash rate of the network decreases, and the recalculation of complexity has not yet taken place.
Sceptics believed that a decrease in hash rate due to the departure of some miners would lead to a decrease in transaction speeds and could eventually lead to the bitcoin network not being able to cope with the complexity of the computation when mining new blocks. There will be no reduction in complexity because the mining has not reached the 2016 block for the network algorithm to revise the complexity. Transactions on the network will slow down, the bitcoin exchange rate will go down - this will end with the paralysis of the bitcoin network and its depreciation as a currency.
Then blockchain expert Andreas Anthanopoulos shattered the sceptics' argument.
The expert drew the cryptocurrency community's attention to the changes in mining since the first coins were mined by the network's creator, Satoshi Nakamoto, and the situation in the industry for 2018.
The days of mining bitcoin on a personal computer are over, with miners entering the process with a detailed business plan and long-term strategy.
Miners don't just make money from mining new blocks. Transaction fees are a smaller part of miners' income so far, but as bitcoin becomes more popular and more transactions are made within the network, it will catch up to, and quite possibly surpass, mining fees at some point.
HALVING'S IMPACT ON THE BITCOIN EXCHANGE RATE
Cryptoanalysts have identified a pattern of bitcoin exchange rate behaviour before and after the halving.
At the time of the halving, the average exchange rate was 50% of the local high after the previous decline in miners' fees. The local high after the third halving differed from the local high after the second halving by 1,610%.
The average increase in local highs between the halvings was 2,572%. By this logic, the bitcoin price by the fourth halving in May 2024 was expected to be $50,000 per bitcoin.
In practice, the value of 1 BTC reached $50,000 already in early 2021. The maximum for bitcoin remains $64,000. Halving also means a reduction in the supply of new bitcoins, which, combined with increased interest in the cryptocurrency from major players, is having a positive effect. It is estimated that 70% of the coins supplied by miners are purchased by institutional capital. Further growth in demand leads to a shortage of assets and their resale at higher prices. This situation can be observed now, as, in addition to funds and corporations, retail traders are actively interested in bitcoin.
Bitcoin halving ensures an even release of digital coins into circulation, prevents inflation, drives up the price of the "first digital currency" and keeps miners interested in mining new blocks, with the consequent transition to only servicing the network and earning from transactions within the network.
Each price decrease is a reminder - the "stock" of blocks is finite, it increases the value of the mined blocks.