Understanding of The Fourth BTC Halving

Introduction

Since the birth of the BTC Genesis Block on January 3, 2009, BTC has been halved three times every four years in November 2012, July 2016, and May 2020. The fourth BTC halving is expected to take place around May 2, 2024. At that time, the block rewards will be halved from 6.25 BTC to 3.125 BTC.

The current market is still in a bear market cycle. As the countdown to the fourth BTC halving is approaching, how should we handle it?

What Is BTC Halving？

BTC halving is also called halving of the BTC block reward, which means that the reward obtained after the production of new blocks is halved approximately every four years. This means that after the production reduction, the BTC reward corresponding to each block excavated is only half of the reward before halving.

The interval between halving BTC production lies not in time, but in the block height, which is the time scale of the blockchain world.

BTC halving has been engraved in the gene since its birth, that is, written in its running code, and cannot be tampered with. For every 210000 block height increase, the block reward will be reduced by half. Since BTC was launched on January 3, 2009, we have experienced three halves.

Some people will question the halving. According to the law of supply and demand in the market, if we do not limit the circulation quantity of a certain commodity, hyperinflation will easily occur and commodity prices will be greatly reduced. Similarly, Satoshi Nakamoto also predicted that if BTC were ubiquitous, its value would be lower and lower.

Therefore, when designing the BTC network, a block can be produced in approximately 10 minutes, and a certain amount of BTC will be continuously dug up. The set BTC reward will be halved every 210,000 blocks, which can effectively and gradually reduce the inflation rate of BTC, thus preventing the occurrence of hyperinflation.

It is also one of the basic differences between BTC and traditional currencies, and also reflects the uniqueness of BTC.

Up or Down After Halving?

On this issue, Marc Andressen, founder of a16z, explained in his 2014 article Why BTC Matters:

The monetary value of BTC is more based on speculation. Speculation is helping BTC establish a sufficiently high price, which will also make the payment function of BTC possible... Part of the reason for the rise in the value of BTC is speculation, but this is not a bad thing. It is precisely because speculation makes its value rise rapidly, so the practical application of BTC will also be much faster than other new technologies.

People always talk about how to seize the opportunity, or how to defeat the market, but in fact, the possibility of success through this low-yield way is extremely low. What’s really important is to understand the price fundamentals and experience behavior.

It is generally believed that the BTC price will rise after halving the block rewards, but beware, the price of BTC will not rise immediately after halving.

The following chart shows the changes in BTC's 30-day average price index in the year before the block reward is halved and in several time nodes in the year after the block reward is halved. These time nodes include:

1 month, 3 months, 6 months, and 12 months before halving;

1 month, 3 months, 6 months, and 12 months after halving.

We can see that, compared with the price trend of 12 months, the price trend of BTC is not so dramatic 1 month, 3 months, and 6 months before the halving, or 1 month, 3 months, and 6 months after the halving, which means that the impact of the "halving effect" on prices will take a long time to manifest.

Source: Trading View

As for the price trend after halving, Patrick O'Shaughnessy, CEO of the asset management company O'Shaughnessy, stated that the bearish view is also worth our reference: since the new supply of BTC will be halved, the income of miners will drop sharply, and the mining difficulty will also be partially reduced. The most efficient BTC miners can gain more market share, and the least efficient miners will quit the game.

Because these additional competitive pressures mean that miners need to invest more money in ASIC mining machines and other operating costs to ensure sufficient competitiveness, they need to sell some BTCs in exchange for fiat currency. The miners' financial situation will become more unstable, which makes them more and more reluctant to bear risks. The situation will also enable the miners to sell their BTC to obtain fiat currency.

Although the price decline may not occur after halving, after all, there are a lot of irrelevant bullish forces in the market, it is true that for miners whose profits are gradually diluted, in order to monetize in time, it is also a selling trend that needs to be faced after halving.

Conclusion

As we all know, BTC halving has now become a clear bullish catalyst, even forming a speculation cycle. However, the future can never be predicted. When the halving date comes, it may not break through ATH immediately, but it is only a matter of time before BTC can reach a new historical high.

Author: Byron B., Gate.io Researcher Translator: Joy Z.

This article represents only the views of the researcher and does not constitute any investment suggestions.

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