Halvings are strongly associated with price cycles in cryptocurrencies and form an intriguing part of Bitcoin’s economic model. But what are they, and why do they happen?
A cryptocurrency halving refers to an event when the rewards for mining or validating cryptocurrencies are cut in half. As mining or validating is usually the only way to mint new crypto, the halving event impacts the number of new coins entering the market, reducing the available supply and increasing scarcity.
[Read now: 5 real-world use cases for NFTs]
In the case of Bitcoin, Satoshi Nakamoto created the halving rules. When Satoshi mined the genesis block, the reward was 50 BTC per block mined. But the Bitcoin codebase stated that there will only ever be 21 million BTC in existence. Every 210,000 blocks, or approximately every four years, the rewards for mining new blocks are cut in half.
The fourth halving is expected in 2024. At that time, the block rewards will decrease to 3.125 BTC. It’s impossible to know for sure what the BTC price will be then, but based on the previous three halvings, there’s evidence to support the idea that halvings influence price.
Satoshi’s rationale for introducing a halving mechanism is clear and sound. A mechanism for reducing issuance over time will concentrate demand and, in turn, help push up prices as long as demand exists.
It sounds deceptively simple; can it possibly work? History tells us that it can because, as Bitcoin has grown and become more familiar to more people over time, demand has increased. Combined with the increasing scarcity, the net increase to Bitcoin’s price has been startling.
Bitcoin’s price increases between halvings haven’t been linear bull markets. But analysts, including the pseudonymous PlanB, creator of the Bitcoin stock-to-flow model, believe that Bitcoin’s price cycles directly correlate to the halving events, which typically come towards the end of a bear market.
Based on past performance, this price cycle theory is compelling. However, there are now more variables at play in the cryptocurrency markets than in 2016, when the second halving took place. It seems risky to assume any single model could accurately predict short or long-term prices.
Nevertheless, Satoshi’s bet on supply and demand theory has so far proven to be an excellent one.
By the year 2140, there will be no new BTC left to mine. So what happens next? After all, miners participate in Bitcoin mining for the rewards, and miners also play a vital role in securing the Bitcoin network.
It’s widely believed that by that time, Bitcoin’s transaction fees will increase to correspond to block reward decreases, thus ensuring that mining remains attractive enough to miners to keep the network secure.
Many Proof-of-Work cryptocurrencies that fork from Bitcoin have halving events. These include Litecoin, Bitcoin Cash, and Bitcoin SV. However, they each operate on schedules and rules that differ from Bitcoin. Furthermore, the price models that use Bitcoin’s halving to predict cycles may not apply to other crypto halvings.
It’s also the case that many PoW cryptocurrencies don’t have a halving, for example, Ethereum in its current iteration or Dogecoin. As an economic model, this method often comes under criticism due to the idea that the unconstrained issuance of new coins may ultimately push prices down over time. However, ETH and DOGE are currently two of the biggest cryptocurrencies by market cap, so the criticism is easily rebuked.
Token halving is also undertaken by many more centralized crypto issuers. For instance, popular exchange tokens like EQO undergo regular halving events to regulate the supply.
Whichever method a project uses to attempt to balance the forces of supply and demand against price, Bitcoin’s halving mechanism is unparalleled in the interest and analysis it generates. Furthermore, it has undoubtedly played an essential role in helping to propel Bitcoin’s value to the point where it’s considered a global asset class.
By now, it's almost impossible not to have heard about cryptocurrency, although you may not be familiar with precisely what it is and how it works. Don't worry, you're not alone.
Bringing digital assets to the world.
EQONEX is a digital assets financial services company focused on delivering a full, digital asset ecosystem that offers innovative, trusted, and transparent products and services.
© 2022 EQONEX Capital Pte Ltd
All rights reserved.