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Created on 22.04.2024

What is the impact of halving on cryptocurrencies?

Every four years, the Bitcoin halving keeps the crypto world in suspense. But what is actually being halved? And what impact does this recurring event have on investors and the Bitcoin price? Below we answer the most important questions about the halving of Bitcoin and other cryptocurrencies.

First things first: it is of course not the price of Bitcoin that is halved, but rather the reward for creating new blocks. Halving is a fixed mechanism integrated into the Bitcoin code that is carried out approximately every four years. The last Bitcoin halving was on 19 April 2024. Given this four-year cycle, the next halving is expected in December 2028.

In particular for Bitcoin, the first, biggest and best-known cryptocurrency, this event always attracts a great deal of attention. No doubt because the three halvings undertaken to date have been followed by price rises, sometimes sharp. But there is much more behind this event than a hope for rising prices. Bitcoin halving periodically reduces the reward received by miners with a view to slowing the rate of inflation and ensuring that the defined cap of 21 million bitcoins is not exceeded.

What are the rules for Bitcoin halving, and what are the consequences? And is this mechanism also in place for other cryptocurrencies? Find out everything you need to know here.

How Bitcoin mining works

Cryptocurrencies are based on blockchain technology, a type of digital accounting system made up of a chain of blocks. Each of these blocks contains a list of the transactions made since the last block. Like an account statement listing the most recent transactions.

The process used to add new blocks to the blockchain is called mining. It is carried out by means of a competition in which the network participants (the miners) try to solve a mathematical puzzle using powerful computers. These puzzles are designed to be difficult to solve but easy to verify. The first miner to solve a puzzle gets to add a new block to the blockchain.

In return, the miner receives the block reward, which comprises a certain amount of cryptocurrency and the transaction fees for the block. The block reward serves as an incentive to participate in the mining process and ensure the continued existence of the network.

Mining plays a key role in ensuring the decentralization of the network, and therefore its security. The participation of large numbers of miners ensures that responsibility for the system is distributed, making it less vulnerable to manipulation and attacks. All transactions are verified and confirmed by the network before being included in a block.

The blockchain technology ensures that once they have been recorded, transactions are transparent, secure and unalterable. Because once stored in the blockchain, transactions cannot be changed or removed. This ensures a high level of trust in the system without the need for any central authority, such as a central bank.

What is halving?

Halving refers to the mechanism by which the reward for mining new blocks is halved. Halving is undertaken after the creation of every 210,000 blocks – which usually takes around four years – and reduces the speed at which new units of a cryptocurrency come into circulation.

Why is halving necessary?

Halving is made possible by virtue one of the main features of Bitcoin: its limited availability. Unlike the volumes of money put into circulation by central banks, which have no upper limits, the Bitcoin supply is limited – to 21 million bitcoins. To ensure that this cap can be adhered to, the reward for creating a block is halved every 210,000 blocks. This slows the rate of inflation and reduces the supply quantity. After the last halving, which is expected in the year 2140 (not a typo), the reward will be reduced to zero.

Who defines the rules for halving?

The halving rules are implemented in a cryptocurrency’s protocol. In the case of Bitcoin, they were defined by Satoshi Nakamoto, author of the Bitcoin whitepaper. While changes to the halving rate or the block reward are possible in theory, they require a far-reaching consensus within the Bitcoin community. Because of the decentralized nature of the network, changes to Bitcoin halving are highly unlikely.

Why is there so much interest in Bitcoin halving?

Bitcoin is the world’s biggest, best-known and most highly regarded cryptocurrency. Everything about Bitcoin is closely monitored. On top of that, halving is seen as an indicator of price fluctuations and market changes. It also influences public perception and investor interest.

What role do miners play?

They safeguard the network by validating transactions and recording them in the blockchain. This ensures that duplication is prevented and that the decentralization of the network is guaranteed. 

What is the mining reward, and how high is it?

The mining reward is the reward received by miners for adding a new block to the blockchain. It comprises a certain amount of Bitcoin and the transaction fees for the block. At the beginning, a new block was rewarded with 50 bitcoins, and there have been three halvings since then:

  • From 28 November 2012: 25 bitcoins
  • From 9 July 2016: 12.5 bitcoins
  • From 11 May 2020: 6.25 bitcoins

With the fourth halving in April 2024, the reward fell to 3.125 bitcoins per block. The fifth halving is expected to take place in December 2028 and will reduce the reward to 1.5625 bitcoins per block.

Why is the exact date of future halvings not known?

The target of the Bitcoin network is to produce a block every ten minutes. Since the exact length of time varies in practice, it is not possible to predict exactly how long the creation of the next 210,000 blocks will take.

What impact does halving have on the Bitcoin price?

The previous three halvings in 2012, 2016 and 2020 were each followed by a massive price increase within a year – but that is no guarantee that this will happen again this time. This is because of the many other factors that determine the price of a cryptocurrency, including market supply and demand, investor confidence and macroeconomic trends.

What motivates miners to create new blocks if they receive only half the reward?

Miners remain motivated because the value of Bitcoin tends to rise, which the lower reward is intended to offset. In addition, miners receive the transaction fees for a block, which also increase as Bitcoin user adoption increases.

Which other cryptocurrencies use halving?

Bitcoin is the best-known example, but by no means the only cryptocurrency to undertake halving. The process is also used by the well-known cryptocurrencies Litecoin, Bitcoin Cash, Bitcoin SV and Zcash. While there are differences with regard to the rules, the basic mechanism is the same: the reward for mining new blocks is halved.

How does halving work with Litecoin?

The number of litecoins is limited to 84 million – four times as many as Bitcoin. This means that halving is carried out every 840,000 blocks, and as is the case with Bitcoin, the interval is around four years. 

How does halving work with Bitcoin Cash?

The maximum supply of Bitcoin Cash (BCH), as with Bitcoin, is 21 million coins. Like Bitcoin, the reward is halved every 210,000 blocks. This rule was adopted from Bitcoin, as Bitcoin Cash was created in 2017 through a hard fork (spin-off) of Bitcoin and retained many of the original protocol rules, including the halving mechanism.

How does halving work with Zcash?

The maximum supply of Zcash (ZEC) is limited to 21 million coins – as with Bitcoin and Bitcoin Cash – but halving is only carried out every 840,000 blocks. Despite the different ratio, the period from halving to halving is also around four years. 

Halving: a decisive factor for crypto investments

Halving is a fundamental mechanism that shapes the development of cryptocurrencies considerably – in terms of both supply and demand and stability of value. This means that it’s important for investors to develop an understanding of the process. A knowledge of halving and its potential consequences is a prerequisite for making informed decisions in the crypto market.

Savings plans for cryptocurrencies

Predicting price trends for Bitcoin and other cryptocurrencies poses challenges for investors. The markets are known for their volatility, and even significant events such as halving come with uncertainties. Although halving is a predictable event, the short- to medium-term impact it will actually have on prices remains uncertain.

Given this uncertainty, the savings plan approach could establish itself as a sound strategy for investors. By investing regularly regardless of current market prices, investors can benefit from the average cost effect. This effect makes it possible to reduce the average purchase price over time, reducing the risk of market volatility. A savings plan can therefore be an interesting alternative for people looking to invest in cryptocurrencies in the long term without having to rely on (uncertain) price forecasts.

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