What is a Bitcoin Halving event?
A halving event, also known as halvening, is when the rewards for verifying a blockchain network are cut in half. In the case of Bitcoin and Litecoin, it is the miners who verify the network, they do this by solving complicated calculations produced by the Proof of Work algorithm. So at the moment the halving takes effect they are paid half as much Bitcoins and Litecoins as compensation for making large amounts of digital computing power available.
Bitcoin and Litecoin have a halving about every 4 years. For Bitcoin, this takes place after 210,000 new blocks have been produced; for Litecoin, it occurs every 840,000 blocks. Please note that the halving does not mean that the total number of coins is halved, it only applies to the newly issued coins.
Why does a Bitcoin Halving Event exist?
You may wonder why it is necessary to halve the reward for the miners, after all they are the ones making sure the network is secure, right? However, the reason for the halving event does not aim to disadvantage the minders.
Vitalik Buterin, the lead developer of Ethereum, wrote an article for Bitcoin magazine in 2012 explaining why the halving is taking place. The article described how Bitcoin is programmed to have an automatic monetary policy. This monetary policy aims to prevent inflation of Bitcoin. An often discussed risk of currencies managed by central authority is the potential for hyperinflation through the printing of large amounts of additional money.
Buterin cites the historical examples of hyperinflation in the German Weimar Republic (1919-1933) and Zimbabwe in 2007. Meanwhile, we can also add Venezuela to this list given the extreme devaluation of the Venezuelan bolívar. Hyperinflation makes money worthless. A 2018 article revealed that in the South American country, toilet paper is now worth more than a stack of bank bills.
Unlike currencies managed by a central bank or government, Bitcoin is deflationary in nature. That is, there is a limited number of Bitcoins to produce and the Bitcoin becomes more valuable the more it is used. In fact, the halving of the miners’ reward continues until the number to be halved is so small that the Bitcoin code no longer allows a halving. At that point, no more new coins will be issued. This is expected to happen around the year 2140.
Miners will have to start paying their electricity bills from then on only with the fees to be received for verifying transactions. Litecoin is a kind of clone of Bitcoin and thus works the same way except for some minor adjustments, such as a higher number of coins in circulation and a slightly faster network. The forecast is that the last Litecoin will be mined around 2150.
Is the price increase of Bitcoin a result of the Halving Events?
An interesting side effect of halving events is that they are usually accompanied by an increase in the price per coin. One reason for a price increase is that there are simply fewer new coins coming in, causing scarcity. Another reason sometimes mentioned is that, in the run-up to a halving, the miners cooperate and agree not to sell their coins in order to increase the price. In this way, the impact of the halving on their income is mitigated because the reward will simply be worth more. Finally, a halving event always creates hype; investors expect a price increase and buy up the coins to realize a profit.
The reason for cryptocurrency price increases
The real reasons for the price increase of new currencies like Bitcoin or Litecoin are often difficult to determine, but at least it seems that halving plays an important role. As data, we can use the two halvings that have taken place in Bitcoin’s network so far. The first took place on November 28, 2012 and the second on July 9, 2016. In both cases, the moment of the halving marked the beginning of a price run that drove Bitcoin to great heights in the 12 months that followed, as shown in this chart. However, an open market often works quite effectively and can ensure that expected developments are already factored into the price before they happen.
For example, we see that the price of Litecoin has already risen significantly ahead of the upcoming Litecoin halving on August 7. From January 1, 2019 to the time of writing this article, the value of 1 Litecoin has increased as much as between 4 and 5 times. So it remains to be seen what effect the halvings of Bitcoin and Litecoin will have on the price this time around. One thing is certain, however, there will never be more than 21 million Bitcoins and 84 million Litecoins issued.
Hyperinflation will therefore not occur with these crypto currencies.