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Bitcoins, and any other cryptocurrency, are created through a process called mining. Miners use considerable computational power to authenticate transactions that have taken place on the Bitcoin blockchain. Once authenticated, these transactions are added as blocks to the blockchain and the miner is rewarded with a certain number of Bitcoin, which then adds to the overall supply of Bitcoin in the market.

The reward for mining, that is, the number of Bitcoin a miner earns for a successful authentication, is set. However, every four years, this reward is halved in number. So, at the time of the launch of Bitcoin, a miner could earn 50 Bitcoins as a reward for processing a block successfully. Following the first halving, this was reduced to 25, which was subsequently halved to 12.5 and currently stands at 6.25 as of the latest halving in 2020. The next halving is due to take place in 2024.

The creator of Bitcoin—Satoshi Nakamoto (a pseudonym used by him or her)—set an artificial limit on the number of Bitcoin that could ever be produced. That limit is 21 million Bitcoin and will be hit around the year 2140. At that point, miners will no longer be rewarded in Bitcoin for their efforts. Instead, rewards will likely take the form of transaction fees in much the same way credit card companies currently charge for transactions.

However, until that point where no more Bitcoin will be made, investors need to keep a sharp eye on each halving event. The reason for this is that the supply of Bitcoin is one of most important factors determining the price of the cryptocurrency, along with the demand for Bitcoin.

How Does Bitcoin Halving Affect the Price?

As explained earlier, cryptocurrencies, including Bitcoin, do not have a central issuer or regulator that can set the price. Instead, the price is determined by the market interplay of supply and demand of Bitcoin.

Following each halving event, the price of Bitcoin has shot up in response to the knowledge that only half the previous number of Bitcoin would be released per authenticated transaction.

The first halving in November 2012, saw the price of Bitcoin soar from $12 to $1,150 within a year. That’s a value addition of nearly 9,500%. Following the second halving in July 2016, the price of Bitcoin shot up from $650 to nearly $20,000 in the next year and half, an appreciation of nearly 3,000%.

The third halving was the most recent to have occurred, in May 2020. The price moved from about $8,500 per Bitcoin to nearly scaling the $50,000 mark in just about a year. As such, the next halving event in 2024 is also expected to boost the price of Bitcoin, as will all subsequent halving events.

Implications for Mining

On the face of it, it would seem that miners would have progressively lower incentives to mine Bitcoin if the reward is going to halve every four years. This does not, however, take into account the increase in price of Bitcoin. Right before the first halving in 2012, the 50 Bitcoin reward had a value of approximately $600. The 6.25 Bitcoin reward currently in place will yield a miner more than $320,000. Mining is more remunerative now than ever before.

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