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MODERN FINANCE The Halving
MODERN FINANCE The Halving
By Philip Dudley
Bitcoins halving is a predetermined event that occurs approximately every four years, or 210,000 blocks, reducing the rate at which new bitcoins are generated by 50 percent.
This process is encoded in the Bitcoin protocol to control its supply and mimic the scarcity of precious metals like gold. Historically, “The Halving” has been a catalyst for the price of Bitcoin as scarcity value increases.
The total supply of Bitcoins is capped at 21 million, with approximately three million having already been lost forever. The continued halving events play a crucial role in managing this limited availability. The halving mechanism ensures that new bitcoins enter circulation at a diminishing rate, leading to a gradual reduction in the overall supply growth.
The first Bitcoins halving took place in 2012, followed by subsequent events in 2016 and 2020.
During each halving, the reward for miners solving complex mathematical problems and adding new blocks to the blockchain is cut in half. Initially set at 50 Bitcoins per block, it reduced to 25 in the first halving, 12.5 in the second, and 6.25 in the most recent one.
The impact of halving events on the market is widely debated. Some believe it can trigger a supply-demand imbalance, potentially leading to an increase in the value of Bitcoin.
As the rate of new coin creation slows down, and if demand remains or grows, the reduced supply may drive up prices.
This phenomenon has historically been observed in the wake of previous halvings. A traditional market is a process wherein supply, demand and price are a constant loop, but Bitcoin is only driven by two adjustable factors—demand and price.
The supply function is determined by what is called the “difficulty adjustment” which aims to maintain 10 minutes for each block found by the miners. This inability to increase Bitcoin production vis-a-vis the difficulty adjustment creates an inelastic supply matched only by a few hard assets such as raw land.
Halving events are significant milestones for the Bitcoin community and are often accompanied by increased attention and speculation in the cryptocurrency market. However, it’s essential to note that the relationship between halvings and price movements is complex, influenced by various factors, including market sentiment, adoption, and macroeconomic trends.
In summary, Bitcoin halving is a fundamental aspect of the cryptocurrency’s design, strategically implemented to regulate its supply and emulate the scarcity found in such things as precious metals.
Because each halving occurs approximately every four years, it continues to be a focal point for investors, enthusiasts, and analysts interested in understanding Bitcoin’s long-term economic dynamics. And if you got lost at “difficulty adjustment,” don’t worry, the Securities and Exchange Commission is having a tough time keeping up as well with this new age store of value.
