The 4th Bitcoin halving arrived on Saturday 20 April 2024 (AEST). Bitcoin mining rewards are now at 3.125 BTC per block, down from 6.25 BTC.
Approximately every four years, the Bitcoin network experiences a halving — an event that has historically preceded a Bitcoin bull run.
So what exactly is a halving and why has it positively impacted Bitcoin's price?
Bitcoin's monetary policy is programmatic and built into the protocol's code. There will only ever be 21 million Bitcoin (BTC), and the schedule for which Bitcoin tokens are mined — or brought into existence — was established in the original design of Bitcoin.
Every 10 minutes or so, a Bitcoin block is mined. A block is filled with records of transactions that occurred on the Bitcoin network. To mine a block, a Bitcoin miner must contribute computational power to the network. For contributing this power, Bitcoin miners earn a block reward — a set amount of Bitcoin for each block they mine.
After every 210,000 blocks — about 4 years — the block reward size is cut in half. For the first 210,000 blocks, the block reward was 50. After the next 210,000 blocks, the reward was cut to 25, and so on.
The halving occurs to control the number of new Bitcoin tokens that come to market and to keep Bitcoin a scarce asset.
Because Bitcoin's inflation is controlled and decreases over time, the asset's price should continually increase — at least theoretically.
Thus far, this dynamic has played out, and it should continue to play out as Bitcoin becomes more widely adopted.
The fourth Bitcoin halving is anticipated to occur on or around April 19, 2024, when the Bitcoin blockchain reaches block height 840,000.
Once this fourth halving takes place, the block reward will be cut from 6.25 to 3.125 Bitcoin.
Only about 6.5% of the total supply of Bitcoin will be left to be mined after the next halving.
The reduction in the number of Bitcoin produced every 10 minutes can bring about a supply shock, which can cause Bitcoin's price to rise.
Prices are determined by the law of supply and demand. When the supply of an asset decreases and the demand for that asset stays the same or increases, the asset's price increases.
Bitcoin was designed to be a deflationary asset like gold. Throughout history, the price of gold has risen. Theoretically, the same should be true for Bitcoin moving forward.
And Bitcoin has its biggest price spurts right after halvings — which is why savvy investors like to buy Bitcoin before halvings.
Bitcoin experienced a dramatic price increase in the year following its first halving.
It climbed from US$12.20 on the day of the halving to over US$1,000 within the year.
Graphic sourceBitcoin's price also skyrocketed after the second halving.
It ran from US$663 on the day of the halving to almost US$20,000 within a year and a half.
Graphic sourceBitcoin's price action in the wake of the third Bitcoin halving wasn't much different.
Its price went from US$8,771 on the day of the halving to almost US$65,000 less than a year later.
Graphic sourceWhile no one can say for sure whether Bitcoin will perform the way it has in the wake of previous halvings after this halving, many are speculating that it will, as a notable amount of capital is expected to flow into Bitcoin via the recently approved spot Bitcoin ETFs (exchange-traded funds).
All 21 million Bitcoin will be mined by the year 2140, so long as Bitcoin miners keep producing blocks every 10 minutes on average.
Once this occurs, miners will have to be incentivised by the fees they will receive for transaction fees on the Bitcoin blockchain.
Even now, Bitcoin miners not only receive block rewards for adding computational power to the network, but they also receive varying fees that users of the Bitcoin blockchain pay for transactions.
Some wonder whether the fees will be enough incentive for miners in the year 2140. It's difficult to predict whether they will, as this largely depends on how many people are using the Bitcoin network at that point in time.
We're two months out from the fourth Bitcoin halving, which means we may soon see a notable increase in the price of Bitcoin.
If history repeats, you might want to allocate funds to Bitcoin as the halving approaches before the price of Bitcoin really heats up.
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