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Halving: What it is and what influence does it have on Bitcoin

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When Satoshi Nakamoto created Bitcoin, his intent was to produce the first scarce, finite and non-duplicable digital good in the history of mankind. The concept arises from the inflation of world governments that increases with the passage of time, a phenomenon that results in an obsessive printing of money to pay debts or state expenses but also results in a devaluation of the currency and inevitably in a decrease. the purchasing power of the population. More currency, less value. We are experiencing a striking example in these pandemic years in which national authorities, to tackle the crisis of blockdowns and health emergencies, have pushed inflation over 3%.


So Satoshi Nakamato decided that the supply of bitcoin must be fixed, without the possibility of increasing it if necessary. New bitcoins are created with each new block. Blocks are created every 10 minutes (on average). The second decision was: bitcoin must be a scarce commodity. To make the scarcity, the creator of the coin decided that every 210 thousand blocks the supply of issued bitcoins should be halved through an event called halving .

Bitcoin transactions are written on a register, the blockchain, that is, a chain of consequential blocks. Transactions are validated by a complex algorithmic process called mining whose mining difficulty increases over time and requires more and more technology and energy, thereby increasing network security. Miners, those who validate transactions in blocks, are rewarded for their work (hence the concept of PoW or Proof of Working) in Bitcoin. Initially, the rewards for each validated block were 50 BTC but, as planned by Satoshi Nakamoto, the cryptocurrency had to become increasingly scarce over time and so he planned to halve the rewards every 210 thousand blocks, approximately every 4 years (one block is validated on average every 10 minutes).

Bitcoin was mined for the first time in 2008 and the first halving occurred in 2012 with the halving of the rewards from 50 BTC to 25 BTC, followed in 2016 by the second halving, halving the number from 25 BTC to 12.5 BTC and finally the third halving occurred on May 11, 2020 with the rewards further lowered to 6.25 BTC. On [Coinmarketcap] (https://coinmarketcap.com/it/halving/bitcoin/) it is possible to follow the countdown to the next halving of 2024 which will see rewards halving to 3,125 BTC.

Satoshi Nakamoto has created a definite supply of Bitcoin coins: 21 million. The mining process will end around 2140 with the last bitcoin mined. Timing is relatively relative as technology could likely reduce mining time and efficiency, and consequently mining costs. The fixed supply of Bitcoin is one of the reasons why it has value. In fact, the principle of economic scarcity requires that a low or fixed supply and a growing demand lead to an increase in prices over time.

Halving and Price

Observing the historical price of Bitcoin in relation to the previous halving, we note not an immediate increase in the price, as it would also be logical to think (FOMO), but a gradual accumulation by investors and subsequently a sharp acceleration on the value of the cryptocurrency and then a massive selling effect called panic selling , which has always settled on a level significantly higher than the previous minimum: from 10 to 300 dollars after the first halving (reaching peaks of 1,000 in the 12 months) and from 300 to 4,000 (reaching 20,000 during the year) after the second halving. The effects of the third halving are still ongoing and BTC has jumped from a low of 3300 to a high of $ 69,000 touched a few days ago.

Model S2F

The relationship between Bitcoin and Halving has so far been reported in the chart by PlanB, creator of the S2F (Stock To Flow) model which clearly identifies the average trend of the cryptocurrency to date and offers a projection of its trend in the near future. Underlying the S2F model theory is the concept that the scarcity of certain assets determines their price. Theory applicable to commodities that have limited supply injection over time (such as gold and silver for example) but it is better applicable to digital currency since there is a well-defined and non-modifiable number.

To date, the model has always held up even in the most difficult periods of Bitcoin, as happened at the beginning of the pandemic and has touched the minimum since the post bullrun at the end of 2017. As you can see from the graph we are now close to the next level which coincides with the price reaching the $ 100k price, which PlanB has claimed it will reach by December 2021.

In the next 4 years, the price will fluctuate on these new values and at the end of 2025 the price will touch 1 million dollars and will increase cyclically. Since we are in a phase of the Bitcoin market called Price Discovering, and not having an important history on which to carry out more in-depth analysis, it is necessary to learn this information with caution. DeFi, NFTs, ETFs and the entry of large institutional and private investors represent a decisive turning point compared to a few years ago, when Bitcoin was defined as a financial bubble.

The entry of Coinbase on Wall Street was the first big success of the crypto sector in world finance, a fundamental step towards mass adoption and this could further condition the next halving in terms of price. The liquidity of Bitcoin on exchanges is constantly decreasing and the demand is increasing. The relationship between these two movements determines the price of the cryptocurrency and it is conceivable that at the next halving the price could really jump towards 1 million dollars.

Halving guarantees less Bitcoin mining, at the expense of increasing energy consumption. These two conditions must necessarily find a balance over time otherwise mining would become not advantageous so as the difficulty of mining and consequently energy consumption increases, with the aggravating circumstance of the reduction of rewards, it will necessarily have to correspond to a substantial increase in price. So the projections of the Stock To Flow model also take these circumstances into consideration and thinking about astronomical figures is not so illogical. Obviously only the future will be able to confirm or refute current theories.

According to several experts, Bitcoin's new market offering will not be able to meet demand in the near future. In detail, if current investment trends continue to persist, after the halving of 2028, daily demand will probably exceed the new market supply. Retail investors and now institutional ones are absorbing liquid BTCs on the market and the data collected so far shows that already the next halving will actually create a critical point between supply and demand and we will probably begin to see much more exchanges in terms of Bitcoin satoshi rather than of units.

Halving is a unique invention by Satoshi Nakamoto to provide value to Bitcoin, the success of the coin comes at a time when there is always a need to anchor to financial certainties defined as Bitcoin, due to the strong uncertainty of traditional markets, conditioning even large international investment groups to accumulate cryptocurrency, also defined as digital gold.

Posted Using LeoFinance Beta