Crypto Investing
11 Jan 2021

Impact of Bitcoin Halving – 5 Lessons it Teaches Us

Nisha Ramesh

Whether you belong to the crypto enthusiasts club or if you happen to pass by. In either case, if you have been following the news this year, you would likely have come across the term Bitcoin Halving. 

Suppose this is the first time you are reading about Bitcoin Halving. Then, I would suggest that you read my previous article – Bitcoin Halving.  It covers a detailed Bitcoin Halving explanation. If you are already familiar with it, then let’s move on with a brief introduction. 

Bitcoin Halving is an event that occurs every four years. This phenomenon cuts down the block reward by half periodically, ensuring that Bitcoins’ supply is in check. 

5 Lessons You Can Learn From Bitcoin Halving

Since Bitcoin’s inception in 2008, the world has seen three Bitcoin Halving events.

It is an arguably significant event for the progression of the Bitcoin network. And here are a few lessons we could learn from the past Halving events.

Lesson 1: Bitcoin is Scarce

When Bitcoin was first introduced, the reward for processing every block of transactions was 50 BTC. In the next halving event, the block reward was cut down to 25 BTC and currently, miners earn a reward of 6.25 BTC.

Since there are only 21 million Bitcoins in total, the last mining may occur in the year 2140, and the block reward then will be a fraction of what is paid now. Thus, Bitcoin Halving affects the supply and circulation of Bitcoins, making it scarcer.

As mining becomes difficult, there may be even fewer bitcoins in circulation since not everyone will be willing to trade.

On the other hand, the more scarce Bitcoins become, the demand for them will continue to increase. 

Lesson 2: Bitcoin Halving Keeps Inflation in Check

Bitcoin was initially designed to be a deflationary currency, and the Bitcoin Halving phenomenon was put in place to ensure it. 

Back in 2011, the inflation rate of Bitcoin was around 50%. And when the Halving took place in 2012, inflation dropped steeply to somewhere about 12%. When the block reward was curbed down from 25 BTC to 12.5 BTC in 2016, Bitcoin’s inflation rate further plummeted to the levels of 4-5%. 

Earlier this year before the halving event occurred, the Bitcoin inflation was ~3.59%. In just fifteen days after the Halving took place in May 2020, the inflation rate fell by 50% and is currently ~1.76%. 

If you read into the numbers, you will find that the inflation levels of Bitcoin decrease every time a Bitcoin Halving occurs. 

Lesson 3: Halving Results in a Bull Run

Bitcoin Halving significantly lowers the number of new Bitcoins that come into circulation. Simple demand and supply economics explains that this creates scarcity. So, the months following a Bitcoin Halving has resulted in a bull run so far. 

To illustrate:

The price of one Bitcoin on the day of the first Halving in 2012 was ~$11.50. In just one year, the price rose to ~$270 in April 2013. 

Fast forward four years, in July 2016, one Bitcoin was ~$650. The price took a steep uptrend in the forthcoming months and reached new heights of ~$20,000. After that, certain events drove its price to a minor dip and now again, in 2020, after the third halving event, we are witnessing a significant bull run in the Bitcoin price. 

However, you must know that these lessons are merely historical facts and should be looked at that way. I would suggest that you study and interpret the patterns before your next move. 

Lesson 4: The Changes Come Much Later

From the earlier lesson, you may have assumed that there will be an uptick in the prices immediately after every Bitcoin halving. Unfortunately, that is not how it works. 

Suppose you study the trends of the past three Halvings carefully. In that case, you will notice that there is a surge in price only after three to six months and not immediately.

For instance:

If you consider the Halving of 2020, the price of one Bitcoin at the time of the event was ~$8,500. And after a couple of months, it was still trading at the range of ~$9,000. But six months later, the Bitcoin price started to take a bull run in Nov 2020. At the time of writing, the price of Bitcoin is at a new all-time high of ~$24,000.

Lesson 5: Mining Cost Increases but Value Remains

By now, you would have learned that Bitcoin Halving reduces the block rewards of miners by half every four years. This means that the cost of mining goes higher by 50% because miners have to use the same amount of time and power to process every block. 

It makes one wonder how mining has more competition though the rewards are diminishing every quadrennial halving event?

It is simple:

We learned in Lesson 1, the Bitcoin Halving makes the circulation of Bitcoins more scarce, and hence demand increases. The rise in demand and low supply results in an increase in the value of Bitcoins. 

The value of 50 BTC in 2011 was significantly lower than 1 BTC today. However, nobody expected such an enormous increase in its value in just a decade. 

But today, we understand the potential of Bitcoin as a store of value. 

Beyond the fact that mining costs have increased. Mining has gotten tougher with an increase in competition because the value of the rewards is rising. 

Impact of Bitcoin Halving

Until now, we have witnessed three halvings. Notably, every halving has brought about a huge impact on the Bitcoin Price because when miners rewards are curbed, the inflow of new bitcoins also reduces. And the demand and supply of economics kick in, thus resulting in a surge in price. Halving also plays a major role in reducing Bitcoin’s inflation rate.

Bottom Line

Know that the information in this article is from a general point of view. I have written about it to expand your knowledge and not as investment advice. 

So if you are looking to invest in Bitcoins, I would suggest that you do more profound research and not just rely on historical facts. 

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Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.


Nisha Ramesh

Content Writer

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