What You Need to Know About The 2024 Bitcoin Halving
We are just months before the 4th Bitcoin halving; an event that initiates a boom cycle for cryptocurrencies by generating massive trading volumes and excessive price speculation.
Cryptocurrencies will prevail again in mainstream financial news, with analysts and pundits supporting the speculative frenzy.
The beginning of all preceding bullish cycles can be attributed to the halving since investors massively enter trades, and volumes increase until Bitcoin reaches a new and unsustainable all-time high price.
We present in this story the halving fundamentals and the parallel terms necessary to understand how the Blockchain works in this matter.
What Is The Halving?
Picture (background) on Pixabay by Thanh_Nguyen_SLQ (modified)
Before we dive into the details of the halving’s economic effect, we have to describe first the concept of the halving and basic knowledge of Bitcoin mining and the blockchain.
What You Should Know About The Halving:
The halving is a term that refers to a line of Bitcoin’s code.
It reduces new supply (mining rewards) by 50%.
You may also find it spelled as “the halvening”.
It occurs approximately every four years (actually, every 210,000 blocks).
The 4th halving will reduce the new supply to 3.125 BTC per block from 6.25 BTC, which stands today.
Bitcoin has a fixed supply of 21 million coins.
Besides BTC, the same procedure exists for Bitcoin Cash, exactly as described for BTC.
With minor numerical differences, the same procedure exists for several other PoW cryptocurrencies (e.g. Litecoin).
How Blocks Are Mined:
Miners are using the hash power of their equipment to produce new Bitcoin blocks that contain transactions. Once they mine a new block, they propagate it to the network (the rest of the nodes), and it gets included in the blockchain if the majority of nodes validate that the block is following consensus rules.
The Coinbase Transaction
Each block contains a coinbase transaction (not to be confused with the Coinbase exchange).
The coinbase transaction includes the block reward, which currently stands for 6.25 BTC.
With the next halving, the block reward will be reduced to 3.125 BTC.
What Else Is On A Block?
Besides the coinbase transaction, a block contains:
The Bitcoin transactions the miner selected from the mempool (a “waiting room” for new transactions).
A block header that contains information about the block (metadata, a timestamp, the block hash), and the hash of the previous block.
The “chain” part of the term blockchain refers to the cryptographic hashes connecting the blocks.
Decentralized Mining
With this mechanism and the support of decentralized mining, the blockchain becomes a single verifiable truth.
All the data exist on a transparent and immutable distributed ledger, open for anyone to research.
The coinbase transaction creates new Bitcoins to reward the miners that provide stability and security to the network. Miners are also rewarded with transaction fees. The issue here is the blocksize, another line of code Satoshi introduced in 2010, as a measure to prevent spam (non-financial) transactions that could fill the blockchain.
With a small block size of 1MB (stretching to 4MB with the Segwit patch), Bitcoin is unable to scale. Furthermore, the bottlenecks that support low block capacity and high fees create centralization tendencies to secondary layers like the Lightning Network which were supposed to be scaling solutions.
The Genesis Block
In 2009, with the Genesis block, Satoshi Nakamoto “mined” the first 50 Bitcoins in existence (actually, the Genesis block was not mined but hard coded to ensure this was the first block in the blockchain).
Then, Bitcoin started running.
During the first two years, every computer could download Bitcoin’s software and start mining and validating transactions.
The problem was that nobody knew about it. Satoshi had notified hundreds of cryptographers who only appeared interested after Bitcoin succeeded.
Initially, it was just Satoshi and Hal Finney, a software developer who was immediately interested in Bitcoin since the release of the whitepaper. Hal Finney (who passed away in 2014) is often suspected as a Satoshi candidate, yet he had categorically denied any involvement.
Still, Hal Finney, besides being the first person who believed in Bitcoin, was also the creator of RPOW, a precursor to Bitcoin’s Proof Of Work system. The suspicions are valid, however, Hal Finney passed away in 2014, and will always remain as a legend for Bitcoiners around the world.
Halving ETA:
Source: NiceHash
The Financial Aspect Of The Halving
The foundation of the free market is established entirely on the principles of supply and demand. The invisible hand of the market, which according to Adam Smith, drives prices to equilibrium.
The free cryptocurrency market is a shining example, although we can’t deny short-term manipulation exists, and exchanges lately are dragging prices of crypto “assets” down by fractionalizing their reserves.
Attacks will happen in a free market as well.
The halving exclusively influences supply, however, demand is also affected temporarily.
Speculation over the halving is only bringing a short-term rise in demand.
Lately, loyal fans of BTC began to consider it similar to a savings account, showing a long-term prospect. Thus, this type of long-term speculation resembles faithful investors in assets they only sell when the price meets the highest target. Although, the long-term savings feature is not a result of the halving. The fixed supply (scarcity of 21 million coins) is the driving factor to consider it hard money, or a substitute for gold.
Since the halving reduces the new supply of coins in the market it also lessens the selling pressure by miners by 50%.
Nonetheless, the new supply is slowly becoming irrelevant.
Source: Statista
Halvings:
block 210,000: 1st halving: Nov. 28, 2012
block 420,000: 2nd halving: July 9, 2016
block 630,000: 3rd halving: May 11, 2020
block 840,000: 4th halving (est.): April 2024
block 1,050,000: 5th halving (est.): 2028
Mining Rewards
2008–2012: 50 BTC
2012–2016: 25 BTC
2016–2020: 12.5 BTC
2020–2024: 6.25 BTC
2024–2028: 3.125 BTC
Bitcoin Mined And Total Supply
2008–2012: 10,500,000 BTC mined (50% of total)
2012–2016: 5,250,000 BTC (15,750,000 / 21,000,000–75% mined)
2016–2020: 2,625,000 BTC (18,375,000 / 21,000,000–87.50% mined)
2020–2024: 1,312,500 BTC (19,687,500 / 21,000,000–93.75% mined)
2024–2028: 656,250 BTC
Less than 10% of the total Bitcoin remains to be mined, in a process that will last 120 years more.
In theory, we have this asset where demand becomes a decisive factor while supply is almost fixed and inelastic.
With a fixed supply of 21 million almost reached (19,470,000 Bitcoins have been mined) we can concur that supply is already stable.
The (perfectly) inelastic supply, combined with increased demand, leads to a parabolic price rise.
When demand for an asset with an inelastic supply increases, it leads to a rapid price boost.
In the chart, the supply is fixed at 21 million, so the S (Supply) curve stays stable, and we reach a new equilibrium point at a higher price (E1 in the chart).
We explored the fourth Bitcoin halving in several stories and concluded that the dynamics that exist will initiate a new bull run for Bitcoin (BTC) and initiate explosive growth.
However, we also explored the fundamental difficulties Bitcoin is facing, leading us to believe that Bitcoin will not excessively overperform during the boom cycle of 2024–2025.
We also have to underline that by favoring just the store-of-value features of Bitcoin, the current community entirely reversed the progress of Bitcoin as digital cash.
Had Bitcoin proceeded with a reasonable increase in block size in 2017, the network effect would have pushed the price to significantly higher levels today.
Investors should probably remain optimistic as the price of $100,000 for BTC is an attainable target.
However, speculation has limits, and the market forces are already moving towards options that support utility. This has been observable since 2017, as Bitcoin (BTC) keeps losing its market dominance and various cryptocurrencies competing for the “throne”.
Source: Coinmarketcap
In Conclusion
We can’t foretell what will happen in case the economy enters a sharp recession, however, historical data suggest that Bitcoin will most likely enter a new bullish cycle and can reach $100k at the peak no matter the macroeconomic circumstances.
This thesis is already getting validation since the fundamentals for a new Bitcoin cycle are already underway.
Institutions like Grayscale and BlackRock will soon offer spot-ETF (Exchange-traded Funds) for Bitcoin BTC and cryptocurrencies like Ethereum, Bitcoin Cash, and Litecoin (the big 4).
These four cryptocurrencies will most likely become frontrunners in the new crypto marathon that begins in 2024.
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Very nice article! One suggestion: a few times in the article, a comma is used instead of a decimal point, which is somewhat confusing. e.g.: "The 4th halving will reduce the new supply to 3,125 BTC per block".