Context:
Every four years, a significant event occurs in the world of Bitcoin known as “Bitcoin halving” and the next Bitcoin Halving is due to take place around April this year.
Bitcoin Halving 2024
- Initiation: This Bitcoin Having cycle commenced with the first halving event in 2012, reducing the block reward from 50 BTC to 25 BTC.
- Subsequent Halvings: It occurred in 2016 and 2020, further halving the reward to 12.5 BTC and 6.25 BTC, respectively.
- New Halving: It is scheduled in mid April 2024 when only 3.12 Bitcoin will be emitted every block.
About Blockchain Technology
- Blockchain technology is a structure that stores transactional records (also known as block), of the public in several databases, known as the “chain”, in a network connected through Peer-to-peer(P2P) nodes.
- This storage is referred to as ‘digital ledger’.
- Every transaction in this edger(storage) is authorized by the digital signature of the owner, which authenticates the transaction and saves it from any tampering.
- Blockchain key characteristic features include decentralization, persistence, and anonymity.
- Blockchain technology discards the need for any third-party or central authority for peer-to-peer.
About Bitcoin
- It was introduced in 2009.
- The origin of Bitcoin is unclear, as is who founded it.
- A person, or a group of people, who went by the identity of Satoshi Nakamoto are said to have conceptualized an accounting system in the aftermath of the 2008 financial crisis.
- A type of digital currency that enables instant payments to anyone.
- It is based on an open-source protocol and is not issued by any central authority.
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About Bitcoin Halving
- The Bitcoin Halving refers to the 50% reduction in the reward paid to Bitcoin miners who successfully process other people’s cryptocurrency transactions so that they can be added to the public digital ledger known as the blockchain.
- A Regulation Mechanism: Bitcoin halving serves as a mechanism to regulate the issuance of new Bitcoin rewards to miners, who play a vital role in securing the network.
- Distinct Market Phases: Examining historical patterns surrounding Bitcoin halving events reveals distinct market phases.
- Pre-Halving: It precedes the event, fueled by speculation and anticipation of reduced supply.
- Post-Halving: It is a period of reaccumulation ensues as the market consolidates before embarking on a parabolic run-up to new all-time highs.
Factors Impacting Bitcoin Halving
- X-factor of Institutional Demand: This time, there is the added X-factor of institutional demand.
- The influx of institutional capital has amplified the effects of halving events, contributing to increased market volatility and speculation.
- Liquidity: It plays a pivotal role in shaping Bitcoin’s price trajectory during halving events.
- Liquidity injections, coupled with monetary stimulus, can exacerbate the effects of halving events, leading to heightened market volatility and potential high runs.
- Multiple Factors: The interplay between supply, demand, institutional adoption, and market liquidity.
- Both corporate and independent Bitcoin miners are spread across the world, trying to leverage cheap electricity prices in countries like Kazakhstan and Iran to mine as much Bitcoin as they can.
Impacts of Bitcoin Halving
- Increase of Value: Bitcoin Halving reduces the rate at which these coins are released, making the asset more scarce.
- Economic theory suggests that scarcity fuels demand, potentially leading to upward price pressure.
- Expand the User’s Base: As the price increases, it attracts more people to Bitcoin, expanding the network’s user base by following the principles of Metcalfe’s law and Reed’s law.
- Metcalfe’s Law: It states that the value of a network is proportional to the square of the number of its users.
- Reed’s Law: It highlights the exponential growth potential of networks through group formation.
- On Investors: It depends on the investor and the extent of their involvement with Bitcoin and its ecosystem.
- A corporate-level miner is probably desperate to earn their block reward these last days while it is still set at 6.25 BTC rather than the much lower 3.125 BTC.
- A new trader, who has invested a small sum of money and knows nothing about the underlying blockchain technology might not have a severe impact.
- A more experienced trader might try increasing their Bitcoin investment in the hope of benefiting from a possible price spike.
Conclusion
Bitcoin halving serves as a critical component of its monetary policy, its implications extend far beyond the reduction of miner rewards, offering insights into the evolution of the cryptocurrency landscape. Understanding these nuances is essential for navigating the complexities of Bitcoin and deciphering its future path.
News Source: The Hindu
February 27, 2024
