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On the occasion of the upcoming block reward split, we decided to clarify how it works and the potential impact it may have. Enjoy the article!
A halving occurs every four years or so (210,000 blocks). It is an event in the world of cryptocurrencies of great importance regarding the changes that take place on the oldest blockchain – Bitcoin.
Let's start by explaining the concept of mining bitcoin. It involves network participants with sufficient computing power, adding further transactions to the blocks that make up the chain. This is based on the Proof-of-Work consensus algorithm. Due to the cryptographic nature of the blockchain, nodes perform specific mathematical calculations to add another block to the chain. The cost to the nodes is time and energy, but in return for their efforts, they are rewarded with cryptocurrency in a certain amount that changes with each halving.
The amount of BTC that can be found on the market is unchanged – it is 21 million. Releasing this supply is the role of the miners. At the very beginning, when BTC in circulation was very little, the reward was as much as 50 BTC, but with each distribution of the block reward, this was halved. There have been three halving to date. The current reward is 6.25 BTC (with a circulated supply of approximately 19,660,318 BTC at the time of writing), but after halving, which is expected to take place in April 2024, it will be 3.125 BTC.
Referring to the law of supply and demand - assuming constant demand, slowing down the release of BTC supply could have a positive impact on the price. Of course, this is only a theory, but it should be kept in mind that the market may take it as an indication for its investments, which will then translate into the value of the cryptocurrency. However, the implications of halving go further. By making it a very significant event for the industry media hype is created around it. This is a natural incentive for those not involved in crypto and experienced investors to pay attention to bitcoin.
Bitcoin was originally intended to be utility money, and to some extent, it has succeeded in this. There are many goods or services that can be purchased with cryptocurrency, e.g. watches, cars, electronics, etc. However, this is not the biggest component of the value of cryptocurrency. Investors in BTC are driven by a speculative motive or treat the asset as a long-term store of value. Here, institutional investors, who can hold hundreds of millions of dollars worth of BTC in their portfolios, have the greatest impact. This type of player is colloquially referred to as 'whales'. Their actions, such as liquidating BTC, can lead to fluctuations in the asset's price.
It is estimated that around 2140 the block reward will drop from 0.0000001 BTC to 0. This will occur at the 34th halving of the network. How bitcoin will perform at that time is impossible to predict at this point. What is known, however, is that the deflationary nature of the asset is its greatest advantage in an era of monetary policies of economies that often aim to undermine the strength of fiat money. Bitcoin's entire operation is in opposition to the currently prevailing trends related to money, and halving is the mechanism for regulating the amount of cryptocurrency in circulation.
*This article does not constitute investment advice.
DISCLAIMER
This content does not constitute investment advice, financial advice, trading advice or any other type of advice and should not be considered as such; zondacrypto does not recommend buying, selling or owning any cryptocurrency. Investing in cryptocurrencies involves a high degree of risk. There is a risk of losing invested funds due to changes in cryptocurrency exchange rates.
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