Everything you need to know about bitcoin halving this 2020

It is the subject of the moment, as for the Bitcoin network and the price of the BTC cryptocurrency is concerned. We talk about halving, an event programmed in the Bitcoin code that occurs every 4 years, approximately, and will happen for the third time this year 2020. That event guarantees that every 210,000 blocks mined in the network, the bitcoin emission is reduced by half.

Attention to the event is such that in recent months there has been a considerable increase in searches for the term on Google. Even in April the popularity of the term in the search engine reached all-time highs.

But why so many expectations around the halving? Will this event make mining equipment stop being profitable? Will the price of bitcoin rise due to a decrease in the supply of BTC in the market? We will answer these and other questions in this article, where we include the most important details you should know about the third halving Bitcoin, scheduled for the middle of this month of May 2020.

What exactly is the halving on a network like Bitcoin?

The first thing you should know about the halving, is that it is an event planned from the beginning in the Bitcoin code. That event guarantees that every 210,000 blocks mined in the network, the rewards to miners are reduced by half, as can be seen in the CryptoNews glossary. Precisely, the name of the event comes from the action of dividing something in half, based on the word half, in English.

During Bitcoin’s early years, each mined block created a total of 50 units of the native cryptocurrency, bitcoin (BTC). Then, upon reaching the 210,000 block, that amount was reduced to 25 BTC per block, in the first halving (2012). In 2016, the second reduction of rewards occurred, and with it it went to 12.5 BTC per block, the amount that is currently produced.

With the average of mining of each block in about 10 minutes, every 4 years the 210,000 new blocks that mark the arrival of a new one are reached. halving. The estimates are mere approximations because the time varies slightly depending on the processing power and the difficulty of mining.

However, the variations are minimal, so it is known with relative certainty how often reward reductions will occur. So much so, that there are various counters available on the internet to check how much is missing for the next halving.

Contrary to popular belief, this periodic reduction in mining rewards is not exclusive to Bitcoin. But it is not present in all blockchains either. Mainly, this mechanism is shared by other networks whose code starts from a copy of Bitcoin.

Among those examples, we can find networks like Litecoin, whose halving occurs every 840,000 blocks. Other networks with the rewards reduction mechanism in half are Bitcoin Cash, created from a Bitcoin fork; and Bitcoin Cash Satoshi’s Vision, which forked from Bitcoin Cash.

In both cases, the halving it is the same as in Bitcoin, every 210,000 blocks. Both Bitcoin Cash and Bitcoin SV had their respective halving at the beginning of April of this year 2020.

Mining, in danger from halving?

Clearly, the first affected with the halving they are the miners. Directly, the activity of their teams will be rewarded with half the bitcoins they received until then.

This affectation has led many people in the cryptocurrency environment to speculate about the possible “leakage” of miners due to the halving. The first thing to understand about this aspect is that, although the rewards are reduced, a hypothetical price rise could make miners keep their profits.

When the first happened halvingIn November 2012, the price of the pioneering cryptocurrency was around 12 US dollars, according to the record of Buy Bitcoin Worldwide. That is, each block, with 50 new BTC, was equivalent to about $ 600 at that time.

Just about 3 months after the rewards cut, the price of 1 BTC was above $ 30. Therefore, the 25 new BTCs that were created with each block were equivalent to more than USD 700 at the time. By the end of that year, the price of a single unit of bitcoin already exceeded $ 600.

The other fundamental aspect is that mined block rewards are not the only source of income for Bitcoin mining. Each block not only generates new units of BTC, but those blocks include the transactions with which users send and receive funds in bitcoin. And these transactions have commissions, which also go to the miners.

What does happen almost unavoidably with the reduction of rewards is that teams whose profitability is already low, due to having a low level of processing power, may lose their profitability. For this reason, large mining farms and manufacturers are preparing for the event by replacing old equipment with new models with greater capacity.

A sign that the reduction of rewards has not generated intentions for a massive exit of miners from the network is the constant increase in the processing rate (hash rate) accumulated in the months prior to halving. This year 2020, with little left for the third halving Bitcoin, that hash rate It has been constantly increasing. This means that there are more machines contributing their processing power or that more equipment with greater computing capacity has been added.

Halving, prices, inflation and the market: do they all go hand in hand?

Will the price of bitcoin rise significantly after the halving of this year? That is the big question that hangs around in the discussions about the future that awaits the cryptocurrency market.

The history of past events seems to strengthen the narrative of high price momentum. But why? First, one of the main elements to consider here is the deflationary nature of the network’s emission policy created by Satoshi Nakamoto in 2009.

On the one hand, there is the periodic decrease in the amount of coins that are issued. On the other hand, the maximum supply ceiling (or the maximum number of units that may exist). In this case, there can only be a total of 21 million BTC.

Both aspects are contrary to the inflationary policies that the central banks use in the creation of fiat currency. Not only do they not have a finite supply of their respective currencies, but they also have the power to print new units as they please, generating inflation and subtracting value from the units in circulation.

The basic equation of the narrative that predicts sustained increases for the price of bitcoin, is then based on the shortage of the asset. That total scarcity becomes more present with each reduction in reward, because Fewer coins enter the market daily.

Historically, mining reward reduction events have been preceded and followed by clear bullish moves for bitcoin in the market. As we have previously said, by the time of the first halving, BTC was barely worth about $ 12. But even that figure represented a nearly 100% increase in value since the beginning of that year.

At the beginning of 2016, the year of the second halving, the price of the cryptocurrency was slightly above USD 400. At the end of that year, 1 BTC was worth more than $ 800, doubling its year-start price. Then in 2017, the biggest bull run in the history of this market would come, with the bitcoin price approaching $ 20,000 towards the end of December.

Another aspect that must be taken into account is that, although the miners receive the new coins created each block, those coins do not directly affect the market. If those miners do not go to the market, adding new currencies to those in circulation, they do not exist in the eyes of the market. They are not part of the offer. Therefore, the incidence of these currencies is not immediate and the possible effects of the reduction of rewards in the market must be analyzed over time.

Too, there is a possibility that the entry of more efficient equipment into the network could drive the price. According to a study by the firm Blockware Solutions presented at the end of March, many farms keep operating their uneconomic equipment to mitigate operating expenses and maintain agreed rates for their electricity consumption.

Therefore, they must sell the majority of the BTC they receive. In a scenario with more profitable equipment, and after the departure of the older equipment, there could be a relief to the selling pressure of the mining sector in the market, further limiting the supply and driving the price, according to the report.

Analysts and their positions vis-à-vis the halving

Various analysts of the cryptocurrency market have stated their position on the possible impact of the halving in the price of the cryptocurrency. The majority position is bullish. Especially considering the background.

In early April this year, for example, analyst Willy Woo wrote on his Twitter against the belief that the halving halved the daily supply of BTC entering the market. “We are overestimating the impact of halving in this cycle,” wrote Woo, based on BTC trading from exchange transaction fees that also enter the market daily.

Beyond bullism, one of the most reiterated positions regarding the possible impact of halving is of uncertainty. While the historical journey shows large increases coinciding with previous rewards reductions, analyzes such as that of Coin Metrics postulate that lThe available information is insufficient to predict market behavior associated with halving.

Other analysts are not so cautious about launching their predictions. Among them, Tim Draper’s vision stands out. For the venture investor, the price of bitcoin could even exceed $ 250,000 after the halving.

Historical review of halving: 2012, 2016 and how we got to 2020

If we review the historical context, we can see that when the first halving bitcoin’s price was not even 15 dollars. Back then, the network was barely known to some enthusiasts and lacked the impact and interest that exists today.

When the second rewards reduction came, in 2016, there were already higher expectations around bitcoin. The price of the cryptocurrency already exceeded $ 400 and just a year later the escalation in the price began that ended up giving bitcoin global visibility.

Now, in 2020, expectations regarding halving Bitcoin rates are much higher. Especially, the expectation revolves around new highs in the bitcoin market price. At the beginning of the year, those expectations seemed to begin to be met, with a performance in January that exceeded that of recent years and invited to expect large increases.

But the coronavirus pandemic arrived, the almost generalized quarantine in the world and, with it, the crisis in international markets that is currently underway. That crisis drove bitcoin below $ 5,000 and seemed to curb the momentum the price was bearing on. halving.

After a couple of weeks of very negative behavior, bitcoin has been recovering. In fact, only BTC and gold have managed to sustain themselves amid the crisis that has affected the oil market, stocks and stock indices alike. Even bitcoin has outperformed gold in terms of performance so far this year.

It remains to be seen whether that rebound will hold up over time. So far, reward reduction events have been followed by new levels in bitcoin’s price. Today, it even seems very difficult to return to prices of the previous reductions. Will it be the same with him halving of this year 2020 in Bitcoin?