Every four years, the cryptocurrency experiences a market bubble driven by the Bitcoin “halving” event. But, what is this event, and why is it important?
People who invest (and speculate in) cryptocurrencies all base their investment strategy on one event – the Bitcoin Half cycle (sometimes lightly called “The HalvingBitcoin uses a Proof-of-Work (PoW) cryptocurrency mining protocol to achieve consensus on the network while securing it against attacks and rogue actors.
This system protects the history of the blockchain from being tampered with by making it physically and economically impossible to do, but it also incurs huge energy costs. To offset energy costs, participants are rewarded with new BTC after each new block is produced. While Bitcoin is criticized for being an energy hog, much of its energy is provided by green crypto-energy mining, as renewable energy is often cheaper and more profitable to pull.
When Satoshi Nakamoto created Bitcoin’s PoW consensus mechanism, they created a unique monetary policy that would be the opposite of fiat currencies like the US dollar. While dollars can be created infinitely and at will, BTC can only be created according to its PoW algorithm and follows a strict inflation schedule that will likely never change. As Investopedia explains, BTC’s inflation rate drops predictably by 50% every four years (specifically, every 210,000 blocks), and this process will continue until 2140, when the last satoshi (smallest unit of a bitcoin) will be mined. What happens after the last bitcoin is mined is still a matter of debate, although the most common theory assumes that miners will rely on transaction fees. The next Halving event will take place around March 21, 2024, according to the Bitcoin Halving Clock.
Why does this cause bubbles in the cryptocurrency market?
When a Halving event occurs, it also halves Bitcoin miners’ profits. When miners earn less bitcoin from mining, they must either cash out each bitcoin at a higher price or sell bitcoin from their reserves to stay profitable. Meanwhile, the supply of new bitcoins sold by miners also decreases as the price rises, allowing the buying pressure from investors/traders to have a stronger effect on the price of BTC.
Each Halving event so far has sent BTC into a two-year price rally, which ripples through other cryptocurrencies and causes the speculation bubbles the crypto is famous and notorious for. Cryptocurrency speculation bubbles mostly come from crypto traders converting their BTC profits into smaller “altcoins” and then selling as hype-driven retail traders pile into altcoins and push higher the costs. Retail traders are also much more likely to practice “HODLstrategy rather than taking profits, often taking losses as experienced crypto traders choose to take profits instead.
Bitcoin’s monetary policy ensures that its total supply will reach just under 21 million BTC by 2140, which is guaranteed by its four-year halving cycle. As blockchain technology matures and cryptocurrencies become regulated assets, it is likely that cryptocurrency speculation will also mature, and eventually the Bitcoin The halving will not induce the same market shock as over the past 10 years.
Next: How Ethereum’s Proof Of Stake transition reduced carbon emissions by 99.95%
Source: Investopedia, Bitcoin Halving Clock