Investing in Bitcoin is popular but also feared because of its large price fluctuations. The recent halving will undoubtedly affect the price, but what exactly does it mean?
Last Saturday, the long-awaited Bitcoin halving took place. After the halving was completed, the reward for miners halved from 6.25 BTC to 3.125 BTC. As a result of the halving, demand for the digital coins could increase.
Is that actually good or bad news? And what does it mean for you? We explain it all for you.
This is exactly what the Bitcoin halving means
To understand what Bitcoin halving is, it is first important to know how the Bitcoin network works. The Bitcoin network runs on a large network where all transactions around the world are controlled and tracked, called the Blockchain. This means that people can exchange digital Bitcoins directly without the need for a central party.
People who want to earn Bitcoins use powerful computers to solve mathematical puzzles. These puzzles are difficult, but if you solve one, you are rewarded with new Bitcoins. This is also known as “mining. Mining helps keep the Bitcoin network secure by verifying transactions and adding them to the blockchain.
(Image: Pexels / Karolina Grabowska)
A halving takes place once every four years and involves halving the reward “miners” get for solving their puzzle. This can affect how many people are willing to mine Bitcoins. And ultimately on how many new bitcoins are created.
It also helps control inflation because people produce fewer new Bitcoins, which keeps the price stable. And because the digital coins become rarer after halving, they become more valuable and harder to get.
Here are the possible consequences
While Bitcoin miners may be balking at halvings, they can actually be good for traders and investors, depending on what they want to achieve. Halvings can affect several things, such as prices and market sentiment, which in turn can affect how people trade and what they think the price will do.
History shows that after halvings, the price of Bitcoin rose and became stronger against the dollar. That may be a plus for some investors. After previous halvings, the price of Bitcoin skyrocketed. By the 2012 halving, the price of BTC/USD popped from about $11 to more than $1,000 within a year.
Changing course (Image: Unsplash)
After halving 2016, the price also went back up, hovering between $580-700 for a few months before rising steadily to around $900 by the end of the year.
But after the May 11, 2020 halving, the price of Bitcoin did not immediately go up. That was mostly due to the coronavirus, which brought the value down. Still, the digital coins shot through the $12,000 mark in July 2020.
But it is important to remember that the demand for Bitcoin can vary greatly and the circumstances surrounding each halving are different. Therefore, it is difficult to say exactly whether a price increase or decrease is directly related to a specific halving.
Are there any downsides?
So after a halving, the price of Bitcoin usually goes up. That’s good news for owners. But there are also negatives.
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Some experts think that other cryptocurrencies may struggle because people will want to invest in Bitcoin in particular after a big rise. There is also a risk that Bitcoin could suddenly crash as miners sell their rewards.
Collapses also create more price fluctuations, which can be both good and bad. Traders can use the fluctuations to make money, but it can also be difficult to predict what the price will do and execute a good trading strategy.
In short, halving could be quite a big shock to global markets and the crypto industry because of all the price fluctuations. But exactly how big those effects are, we will hopefully know soon.
