It’s almost that time of the year again – it’s almost time for the next Bitcoin halving next April. For the uninitiated, halving events take place to reduce the rate at which new coins are mined or created, to lower the rate of new coin supply. A halving event effectively cuts the rewards for mining Bitcoin transactions by half. As can be expected, the approaching ‘halving’ – which incidentally sounds like an event from the Hunger Games – tends to trigger a flurry of activity spurred on by both strategic planning to exploit the situation as well as much market speculation. The approaching halving event will be Bitcoin’s fourth since its inception and is set to occur at a block height of 840,000. Given the volume-based cutoff, establishing an exact date or time for the event is difficult, especially considering the variables at play in the market. The current estimation is that the halving will take place on the 23rd of April next year. Given the uncertainty and the volatility of the situation, it is essential that all market players, irrespective of their size, take a balanced approach to the challenge.
Bitcoin miners have so far been awarded 6.25 bitcoins per transaction mined since 2020, a figure which will decrease to 3.125 bitcoins from next April onwards. It was last halved on the 11th of May, 2020. The last halving is expected to take place in 2140 when the reward for a transaction mined approaches one satoshi. This is when a proposed limit of 21 million coins reaches circulation. One satoshi is the smallest unit or denomination of Bitcoin. Once this limit is reached, miners will be further incentivized to participate in validating transactions through a fee paid by the network users. Historically, Bitcoin halving events have generally resulted in increased market and investor interest. The extent of the interest a halving generates has even given rise to debates on whether the price appreciation cycles of cryptocurrencies are primarily driven by them.
Mining, of course, is the process by which cryptocurrency transactions are validated in a block. Once legitimacy is confirmed, a new block is opened, and independent nodes or computers then verify transactions further in a series of confirmations. This creation of a chain of blocks containing verifying information forms the ‘blockchain’. A halving occurs when a network effectively mines 210,000 blocks – which happens about once every four years. As can be gathered, therefore, this interval of four years is determined by the speed at which coins are mined. The mining algorithm for Bitcoin is set up to meet a target of finding new blocks once every 10 minutes. Some blocks take less than ten minutes, which affects when the next halving event takes place. With the halving of rewards, it also halves the rate at which new bitcoins are released into public circulation. As can be expected, this has a considerable impact on everyone concerned with Bitcoin as well as cryptocurrency in general. It can be expected for example that the diminishing rewards will cause smaller miners to drop out of mining, resulting in an overall consolidation in the Bitcoin ecosystem.
Cryptocurrency halving events should not be confused with crypto forking events, which are events in which the rules governing a blockchain are amended or modified. These modifications result in blocks produced under the old rules being rendered invalid. The term ‘fork’ represents this split in the blockchain network. Forks are typically associated with the launch of new tokens or coins, where existing blockchains are split or forked to allow for the new cryptocurrency. Generally, a new token is created from scratch by copy-pasting existing code, which is subsequently modified to be launched as a new coin. This requires that a network be built from scratch for the new coin, and new investors persuaded into buying into the project. The other option is forking the existing blockchain. In forking, modifications are made to existing blockchains instead of starting from ground zero. The splitting point is the start of two versions of the same blockchain.
The forking itself can be either a hard fork or a soft fork. As perhaps the term implies, a hard fork can be considered as a drastic change in the software behind blockchains which forces users to upgrade to its latest version. User points or nodes that don’t upgrade will be forced out of the updated blockchain – which means that the presence of users who simply do not upgrade can result in two separate blockchains using different variants of the same software. Creating Bitcoin cash is an example of a hard fork in a blockchain. Changes that are not so drastic only require a softer upgrade, or a soft fork, which is generally backwards compatible on the blockchain. Soft forks are generally limited to software updates to the blockchain. While the updated version is the one that is responsible for validating transactions, nodes running on older versions can still see the new blocks being created as valid entries. This is a one-way street, however, as the upgraded blockchain does not recognise users who are still running on older versions of the software. A soft fork can only function if at least the majority of miners on the blockchain upgrade to the new version of the software.
Unlike a halving event, a fork in the blockchain can have relatively less impact on traders. However, the impact is not zero. The creation of a new token specifically can have far-reaching implications on the wider market, especially if it manages to garner a considerable amount of traction. A hard fork can result in price volatility for other tokens, which can sometimes even result in exchange platforms suspending their operations until they stabilise. As for the halving, Bitcoin is expected to rise in value until values are slashed come April – when the price is expected to rise again. However, this does not constitute financial advice, and it is not prudent to base all your financial decisions, or even any significant portion of it, on these general expectations.
(Theruni M. Liyanage)