Bitcoin is scheduled to halve next year. If you’re new to the scene, that might sound scary as you may have heard the prices will go up. However, if you’ve been around a little longer, you’ve already been through one or even two halvings before. After all, unlike forks, halvings are supposed to happen rather than allowed to happen. That doesn’t mean that halvings don’t change things.
So, what is a halving, and how might it impact you?
What Is the Halving?
To understand what a halving is, we’ll have to take a quick refresher course on how Bitcoin works.
Bitcoin is introduced into the market by miners who are rewarded with cryptocurrency for their work. Mining in the crypto world is solving complex mathematical problems to confirm blocks on the blockchain. These blocks are the collections of transactions that make cryptocurrencies secure and transparent.
Mining can be a pretty lucrative gig but it isn’t easy and it isn’t cheap. High end “mining rigs” – computers specifically built for mining – can be pretty costly and use a lot of power. If you know your way around computers you can make a mining rig yourself. However, competition is so steep that a homemade rig isn’t going to make as much as a built-to-order machine.
Competition isn’t the only thing that makes mining difficult. That’s where the halving comes in.
The Halving and Miners
During a halving two things happen that only directly affect miners. The problems that they have to solve become harder and the reward that they get for confirming a block decreases by a half. There used to be 50 bitcoins created every ten minutes. Then 25, then 12.5. After the next halving, it’ll only be 6.25. This is done to protect scarcity.
In order for a currency to have value, it needs to be limited. When there’s too much of a currency, the value drops. This is called “inflation”. Commodity currencies like oil and gold aren’t generally threatened by inflation because they are already limited resources. Fiat currencies are threatened by inflation but the governments that control them have means to prevent it. Cryptocurrency isn’t naturally limited and no government controls it so the scarcity needs to be protected by other means. Halvings are one of those means.
The Halving and the Rest of Us
As briefly mentioned above, there have already been two halvings since Bitcoin was launched in 2009. The first was in 2012, the next in 2016, the next in 2020, and so on. Meanwhile, the value over that period has been generally increasing. Despite its occasional dips, the trend line for value has remained consistently positive.
Because the price has generally been up during both halvings, it’s not necessarily safe to say that there is always a price increase associated specifically with halving. However, we can try to get a little more specific with trends.
At the time of the first halving, Bitcoin was going up and there was a sharp price increase shortly after.
During the second halving, Bitcoin was in a slump and the price went down further in the months following the halving.
While some are already speculating that the third halving will necessarily raise the price, that’s probably under the assumption that the price is still going up in May of 2020.
Prices are currently skyrocketing, and there’s no reason to think that they won’t be during the next halving. However, anything could happen between now and then.
The having can be a time of uncertainty but it’s nothing to be afraid of. We still don’t really understand how halvings affect value in the short term but they aren’t about the short term. Rather, they’re a necessary part of keeping prices more stable over the long run.