OFC Margin Trading 101: What is Bitcoin Halving?

By The OFC Academy on The CapitalWhat is the Bitcoin halving?A Bitcoin halving (also called a Bitcoin halving) is simply an event that reduces the block reward. Once a halving occurs, the reward given to miners for validating new blocks is divided by two (they only receive half of what they used to). However, there is no impact on transaction fees.In the above chart, we can see the decrease in the block subsidy over time and its relationship with the total supply. At first, it may seem that the rewards have dropped to zero and that the max supply is already in circulation. But this is not the case. The curves trend incredibly close, but we expect the subsidy to reach zero around the year 2140.Why does the Bitcoin halving happen?It’s one of Bitcoin’s main selling points, but Satoshi Nakamoto never fully explained his reasoning for capping the supply at twenty-one million units. Some speculate that it’s merely a product of starting with a block subsidy of 50 BTC, which is halved every 210,000 blocks.Having a finite supply means that the currency is not prone to debasement in the long run. It stands in stark contrast to fiat money, which loses purchasing power over time as new units enter into circulation.It makes sense that there are limits on how fast participants can mine coins. After all, 50% were generated by block 210,000 (i.e., by 2012). If the subsidy remained the same, all units would have been mined by 2016.With the halving mechanism, there is an incentive to mine for 100+ years. This gives the system more than enough time to attract users so that a fee market can develop.What impact does the Bitcoin halving have?Those that are most impacted by halvings are miners. It makes sense, as the block subsidy makes up a significant part of their revenue. When it is halved, they only receive half of what they once did. The reward also consists of transaction fees, but to date, these have only made up a fraction of the block reward.Halvings could, therefore, make it unprofitable for some participants to continue mining. What this means for the wider industry is unknown. A reduction in block rewards might lead to further centralization in mining pools, or it could simply promote more efficient mining practices.If Bitcoin continues to rely on a Proof of Work algorithm, fees would need to rise to keep mining profitable. This scenario is entirely possible, as blocks can only hold so many transactions. If there are a lot of pending transactions, those with higher fees will be included first.Historically, a sharp rise in Bitcoin price has followed a halving. Of course, there isn’t much data available as we’ve only seen two so far. Many attribute the price movement to an appreciation of Bitcoin’s scarcity by the market, a realization triggered by the halving. Proponents of this theory believe that value would once again skyrocket following the event in May 2020.Others disagree with this logic, arguing that the market has already factored the halving in. It’s not like the event comes as a surprise — participants have known for over a decade that the reward would be reduced in May 2020. Another point often made is that the industry was extremely underdeveloped during the first two halvings. Nowadays, it has a higher profile, offers sophisticated trading tools, and is more accommodating to a broader investor pool.When is the next Bitcoin halving?The next halving event is expected to take place in Jan 2025 when the reward will further drop to 3.125 BTC.The Capitalhttps://medium.com/media/3b6b127891c5c8711ad105e61d6cc81f/hrefOFC Margin Trading 101: What is Bitcoin Halving? was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Author: The OFC Academy

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