When it comes to the world of Bitcoin, it has grown by leaps and bounds in a short amount of time. In the past, people used to look at Bitcoin and think that it was some fad that was going to fade into the past in a short amount of time. Bitcoin has instead exploded and now has the attention of seasoned financial professionals as well. Many people are looking at the distributed network that has been put together with Bitcoin and is wondering if this has the potential to become a form of currency that can be used to buy traditional goods and services.
Bitcoin does not have a central arbiter in control, which is one of the things that makes it unique. Now, people are looking at how Bitcoin is managed and wondering what this means for the future. Recently, Bitcoin underwent an exciting development where the block reward of Bitcoin was cut in half. People need to understand what this means for the popular form of digital currency.
The Third Time in History
When Bitcoin underwent a halving of its block reward, this was only the third time in history that the process took place. The award in terms of Bitcoin for each block that was mined was dropped from 12.5 BTC to 6.25 BTC. This also means that only half as many Bitcoins are going to be put into circulation when a transaction is solved, and a new block is verified and entered into the system. On average, a new block is put into the chain every ten minutes. Many people are wondering what type of implications this is going to have on the world of Bitcoin as a whole.
First, it is essential to note that this event came as no surprise. There are a lot of analysts and investors who have been waiting for the Bitcoin halving event to take place for more than a year. At the same time, this doesn’t mean that all of the implications have been worked out. Indeed, both the short and long-term impacts of the halving of Bitcoin are still up for debate. This has the potential to impact the entire digital currency market, and people need to be prepared.
To answer these questions, it is crucial to take a look at what makes Bitcoin unique and the role these properties play for the economic response. This is going to have a significant impact on traders and miners alike. The best way to take a look at the effects of Bitcoin halving is to go back to the basics of economics. This starts with the prospect of supply and demand.
Bitcoin is a Limited Resource
The first way that Bitcoin is unique is that this is a limited resource. Unlike other forms of currency, there is no way to print more Bitcoin. The idea of halving Bitcoin was to slow the rate at which Bitcoin would enter into circulation. There are only so many Bitcoins that can be made. With this in mind, there will only be as many as 21 million Bitcoins put into the system. This is a predetermined market that has been set in stone. As a result, the knowledge that there is a fixed number of Bitcoins that can be produced is going to play a significant role in how the markets respond to the prospect Bitcoin halving.
Deflation vs. Inflation Will Play a Role
Next, it is essential to take a look at the roles of inflation and deflation. This is one of the key distinctions that will have to take place. First, Bitcoin is an asset that has been designed to deflate. This is different from fiat currencies, which usually inflate. As a result, over time, the buying power of a single Bitcoin has been designed to go up. On the other hand, traditional currencies, such as the dollar, are gradually losing their buying power over time due to the rapid rate of inflation.
This is only going to become more critical as the rest of the decade continues to unfold. There are unprecedented rates of money printing taking place in the United States. One of the biggest reasons for this is that exceptional circumstances are surrounding the pandemic. This is having a tremendous effect on the economy. As this reality continues to materialize and more pressure is placed on the US Dollar, this is going to have a significant impact on the value of digital currencies such as Bitcoin.
With the global circumstances in mind, it is essential to note that other aspects are playing a role in the growth of the digital currency market as well. Even after the Bitcoin halving takes place, supply and demand are going to continue to play a role in the growth of Bitcoin and other forms of digital currency.
Taking a Closer Look at Supply and Demand
With the block reward for a single block mined of Bitcoin having been cut in half, the result is that fewer numbers of these coins are going to enter into circulation for each block that is mined. The theory is that the reduction in the number of Bitcoins that are flying into the market is supposed to lead to an increase in price. This is supposed to stay true even if the demand remains the same because the supply of Bitcoins is going to drop. One side of the scale shifts, and the other has to respond.
On the other hand, some analysts say the anticipation of Bitcoin mining has already been built into the price. They claim that the market has seen this coming and has already responded. This is similar to a company in the stock market that is anticipating to beat its earnings projection. As a result, the price goes up ahead of the announcement because people are expecting a good result. This is one of the uncertainties when it comes to how Bitcoin will respond to the halving event. Has the anticipation already been built into place? Or, does it still need to respond to the reduction in supply?
Looking at the Response to Previous Halvings
To get a better idea of how Bitcoin is going to respond to the halving event, it is helpful to take a closer look at what happened with the previous events that unfolded. The first Bitcoin halving took place in 2012. The second Bitcoin halving took place in 2016. In these situations, the reduced supply directly led to an increase in hoarding among miners. This led to a rise in price as well. As a result, both Bitcoin halving events led to a bull market period that lasted for up to a year following the initial event. Therefore, many people are pointing to these initial events as a way to predict what is going to happen with this halving event.
Now, it is important to note that the price of Bitcoin didn’t merely go up, but it led to new all-time highs when the halving events took place on both occasions. As a result, there has been a lot of speculation that the price of Bitcoin might reach a new high in the next few months in response to this event as well. This has the potential to play a significant role in the future of the world of Bitcoin. Some people are even saying that those who hold Bitcoin might end up becoming a millionaire as a result of it. While these might be lofty projections, the result remains to be seen.
Change is Coming for Bitcoin
While there are a lot of projections being thrown around, it remains to be seen what will happen with Bitcoin. The only sure thing is that change is coming for people in the world of Bitcoin. This includes those who mine Bitcoin as well as those who trade it. Bitcoin has been one of the most exciting assets to watch during the past few years. In the years to come, it is sure to continue to evolve as the global economy changes as well.