Bitcoin Halving and cryptocurrencies, what is it?
Many projects in the crypto world space have very nice philosophical, technological, and economic proposals, attracting a greater number of followers interested in fast-growing business opportunities.
One of the most popular measures to guarantee the aforementioned is a mechanism called "Halving", a process that will take place within the Bitcoin Network in a few days.
What is the Bitcoin Halving?
Miners receive a reward for every block that they process. Every 4 years, this reward is halved. The bitcoin community calls this event Halving. Its purpose is to difficult the mining of new bitcoin since there is a limit for the total amount of circulating BTC. The Halving would take place every time the network mines a total of 210,000 blocks by design. Although the blockchain generates a new block every 10 minutes, estimations agree that by 2140 all bitcoin will be mined.
Unlike fiat money, Bitcoin and many other cryptocurrencies have deflationary properties, since there are a finite amount of tokens. This deflation makes the coin gain value over time until the hard limit programmed. These properties are not unique to bitcoin. All the cryptocurrencies derived from it have the same halving mechanisms: Litecoin (LTC), Bitcoin Cash (BCH), Bitcoin SV (BSV) y ZCash (ZEC). All of them use the proof of work (PoW) algorithm.
After each Halving there was a significant drop in hash rate in the short term. Analysts highlight that one of the aspects that drove up the price of bitcoin had to do with the diminishing offer and increased demand, which generated greater public interest in Bitcoin, further promoting its adoption as a means of payment, and a valuable investment. Despite the hash rate drop in the short term, precisely because of the little feasibility of these operations for people with less powerful devices, after each Halving, the levels increased again in the medium term due to the launch of new types of specialized hardware (ASICs). Such equipment optimizes electricity consumption levels and exponentially increases the number of calculations to be made per second, being much more profitable for operators than those of previous versions of the hardware.
The WinBTC website has a nice infographic that explains perfectly how halving works:
Halving and Pandemic effects
What will happen? Nobody knows. In the past, prices before the two previous halvings soared bitcoin price. But this time is different. The COVID pandemic adds lots of uncertainty to the current scenario. From oil to stocks every financial asset has been affected by the crisis. But at some point, cryptocurrencies outpaced oil and stock performance in terms of rising prices and lower volatility. Currencies, such as Bitcoin and Ether, begin to recover favorably and are heading towards the levels before their fall, while the oil and industrial markets continue to suffer the consequences of COVID-19.
The aftermath of halving and the coincidence in time with the COVID-19 crisis will be very interesting for cryptocurrencies. Economic effects like skyrocketing debt, inflation (or deflation) effects in fiat money will test the ability of crypto to make its point as a form of payment or value storage.