Imagine you are a baker in a bakery producing a fixed number of cakes on a daily basis. Every four years, you decide to reduce the total number of cakes you produce daily. After the first four years, you bake 25 cakes daily. Second year, you bake 12, 3rd year you bake 6 etc. The reduction or halving of these cakes represents bitcoin halving where the reward for miners decreases every 4 years. So why after 4 years?
This happens to maintain this happens to maintain the scarcity of bitcoin. The process of having involves reducing the rewards miners receive for validating transactions on the Bitcoin network. The following are reasons why this happens every 4 years.
Supply control: bitcoin has a maximum or fixed supply of 21 million coins. The the primary reason for this halving is to control the supply of Bitcoin. By reducing the reward every 4 years, there is scarcity in this asset which makes it deflationary and the creation of new bitcoin slows down over time.
Consistent mining rewards: The transactions on bitcoin are confirmed and added to the blockchain by miners. After successful validation by these miners, they are rewarded with new bitcoins for their efforts. This reward has been reduced drastically to prevent sudden inflation of the assets.
since bitcoin operate on a decentralized system and encoded with a predetermined algorithm, the halving process takes place as its encoded into this algorithm which makes it less prone to central authority.
The halving events of bitcoin behave historically been associated with notable trends in prices of assets. Little wonder majority are anxiously waiting for the halving month to commence so they'll reap the fruit of the labour from trades and recover all they've lost as they'll be an increase, a bullish trend in the market. To understand these price trends, let's understand its dynamics before and after the halving month.
Let's start from the first halving year which started in 2012 after its launch in 2009. The rewards miners do receive for validation of transactions in the blockchain was 50 BTC at first but this year it was reduced to 25 BTC per block. The price of bitcoin went from $12 before the halving to approximately $1150 after the halving. This surge was as a result of increased demand and reduced sell pressure.
In 2016, the reward for miners was reduced from 25 BTC to 12.5 BTC and during this year, bitcoin price was about $650 before the halving. It rose to nearly $20k after the halving. This increase led to the infamous bitcoin bill run of 2017. I can imagine how profitable traders were during that period. This was the second halving year.
The third halving happened in 2020 and this was the halving that occured in May 2020. It reduced miners reward from 12.5 to 6.25. The price of bitcoin then was $8000 and rosed from that price to $60k in April 2021. This increase due to increased demand made traders gain a lot from the market.
While bitcoin tends to experience series of bullish trends, the period of consolidation and retracement usually occur after the initial stage. This phase makes it possible for the market to absorb the impact of the halving and for the establishment of new prices of an asset. During this post consolidation period, bitcoin may fluctuate and they'll be volatility likely…. There'll also be sentiments in the market and external factors which would play an important role in the movement of price of an asset
So in conclusion, we've seen why bitcoin halving occurs every four years and what slashing is done during these four years. We've also see what happens before and after the halving in terms of the price of an asset. It's worth keeping in expectation….
Disclaimer :Any financial and crypto market information provided in this post was written for informational purposes only and does not constitute 100% investment advice. It's just basic knowledge every crypto trader or investor should have
