What is cryptocurrency halving: how it happens and its examples

     One of the characteristic features of the modern world is the rapid development of digital technologies, which also include virtual currencies. The realm of the stock market is quite complex and includes a large number of terms that may not be clear to novice traders, investors or coin miners.

     Since the concept of "cryptocurrency halving" is firmly rooted in the field of assets, so it is important to understand what it means and what nuances it implies. After all, it plays an important role not only for the participants of the cryptocurrency platform themselves, but also for the entire coin network as a whole.

What does the term mean?

     To understand the meaning of the word, you need to understand how cryptocurrency platforms work. So, the main task of miners, that is, miners, is to find or generate new elements in the blockchain of a coin - blocks. They record information regarding absolutely all transactions without any exceptions. Such a component of the information chain can be found by solving a mathematical problem or using special computer equipment - a miner or an entire mining farm. After verification, transactions are written to the very elements of the blockchain, and the miner at the same time receives benefits in the form of assets. Thus, in a highly competitive environment, cryptocurrency is being released (issued). Mining is also the process of securing the network and processing transactions.

     Halving (from the English - halvening - division by two) is the process of reducing the rate of generation of new units of cryptocurrency through a certain code laid down by the developers of the electronic cash system. It aims to preserve the purchasing power of the cryptocurrency. The consequence of a periodically occurring event is the halving of the miners reward for the mined block. This is a deliberate complication of cryptocurrency mining in order to regulate its emission and cost - the unique properties of cryptocurrencies that distinguish them from fiat (real) money.

     So when creating the popular Bitcoin on the market, Satoshi Nakamoto developed a principle that keeps inflation under control in the decentralized system of electronic cash on the network. He regulated the standard for the Proof of Work protocol. This rule is based on the fact that the final emission of the coin is limited to 21 million assets, and every 210 thousand blocks of the chain, the premium for the extraction of each of them is reduced by 50%.

     Since up to six elements are formed per hour, halving is performed approximately once every four years. The Litecoin cryptocurrency has a similar system. The reduction in income by half for the formed block of the coin took place on August 5, 2019. Halving in the blockchain of this network occurs every 840 thousand elements of the information chain. On August 1, the founder of the Litecoin (LTC) network, Charlie Lee, announced that the next asset cut is planned for 2023.

     But what does a decrease in the reward for mining currency imply? This means that the profit from mining is cut in half in relation to the total income from the generation of one block of the chain. For a better understanding of the issue, it is advisable to consider an example of halving: if a user of a cryptocurrency platform forms an element of the blockchain information chain, then he is entitled to income in the amount of a fixed amount of assets. For example, the reward is 10 Bitcoins per solution, but after the cut, the miner will receive only 5 coins for the deposit, and after one more - 2.5 and so on. Of course, the fact that 21 million assets will be generated does not mean that all coins can be disposed of. Lost units are also taken into account and will never be recovered. This digital money accounts for about 1/3 of all mined to date.

Why is this necessary?

     Based on the foregoing, a question is brewing regarding the fairness of the user reward system. After all, why such changes in general, when you can leave the amount the same? But here the law of supply and demand comes into force.

     Subject to the very rapid formation of new currency coins, their total number will grow rapidly and uncontrollably. That is, in the end, there will be so many assets in circulation that they will not be of particular value. This process entails a very detrimental result for the entire system - depreciation. Therefore, halving is one of the levers of influence on the rate of cryptocurrency inflation in the market. So it can be adjusted and the position in the sphere can be controlled.

     Indeed, one of the main disadvantages of real money, which is regulated by central banks, is that it can be issued in unlimited quantities. The structures themselves set the emission level and thereby control the demand in the foreign exchange market.  

     At the same time, digital assets play the role of imitating fiat money, such as precious metals. There is a limited amount of gold, platinum and other similar resources in the world, so with each gram mined, it becomes more difficult to get the rest. The same situation is typical for cryptographic tools. That is, the more coins a cryptocurrency has, the less its demand and cost. And vice versa - the more rare an asset, the higher it is rated by users.

     Summing up, we can highlight that the main goal of the procedure is to create a kind of deficit of a cryptographic asset. In fact, halving should lead to the fact that some of the earners will close their farms and thereby reduce the growth of supply on the market. With the continued growth in demand, this will contribute to an automatic increase in the price of tokens.

Advantages and disadvantages of halving remuneration

     This process should be viewed from several perspectives:

• from the point of view of network earners;
• in relation to the platform itself.

     As for the miners of the system blocks, for them such a process is somewhat negative, since, provided that the same computing power is used, the user receives half as much. But it is also worth considering the factor of stimulating miners to work more actively and improve their own mining farm or equipment.

     If we consider the process from the standpoint of the cryptocurrency resource itself and its performance, then such a cut in income brings only positive changes. So the issue of assets is limited, and, therefore, it is much easier to control coin quotes. At the same time, you can even use halving in order to raise the exchange rate on the market, which, in principle, is used by companies quite often.

     Of course, cutting rewards by 50% in the future may lead to the fact that the mining segment will be under the control of a limited number of people who, as needed, developed and improved their technical basis for mining. But analysts have not yet confirmed whether such forecasts will be confirmed for certain. Whether smaller miners will be able to "stay afloat" in the mining environment can only be said over time. 

     One thing experts know for sure - such a solution helps to eliminate the problems typical for real money. Also, the limitation of the release of new coins and its strict regulation in automatic mode thanks to the program code is a unique feature of digital currencies.

Conclusion: the whole importance of halving lies in the fact that it is part of the structure of the economic model of cryptocurrencies, is responsible for the stable rate of creation of new coins and keeping inflation under control. The inflation control feature differentiates the decentralized electronic cash system from traditional endless supply fiat currencies.    

How halving works

     To work effectively on the site and receive a stable income, you need to know how halving takes place. The standard strategy for generating income during the cutting process involves investing in a resource at the time of growth, that is, 2-3 months before the procedure. Then profit declines due to the outflow of miners due to lower profitability. And as a result, again the development of a long position with the expectation of establishing an equilibrium value in the first month after halving.

     Initially, such a move was used exclusively for Bitcoin, which was a pioneer in the world of cryptocurrencies. But due to the fact that profit is available to miners at other sites where mining is open, the tool is applicable to them as well. That is, on platforms with the Proof-of-Work protocol algorithm, where mining is available to customers, it is quite advisable to use this very effective control method.

Halving Litecoin

     The leading position in the top blockchains is occupied by the LTC coin, which has been functioning for eight years. Its creation began in 2011, and the maximum number of coins issued into circulation is 84 million. The trimming occurs every 210,000 blocks, on average every 4 years. Even though the supply of the asset is larger than that of the popular Bitcoin, halving occurs at the same frequency.

     Introducing the topic, it is also worth mentioning the term "hashrate". It means the total computing power of computer technology used to mine digital money. Measured in hash / sec (H / s).

     Also, for reference, it is advisable to know about changes in the indicator. If the hash rate has increased, it means that new clients have joined the system, that is, new mining equipment.

     The computing power of the system is growing, therefore, much less time will be spent on the formation of a blockchain element than at a lower level of the indicator. The more quickly new units of an asset are mined, the more difficult it will be to mine the next block of the information network chain. Such a mechanism to complicate production serves as a restraining tool, since due to uncontrolled and unlimited growth of capacities, it will be available to complete the emission prematurely (that is, earlier than the Roadmap suggests). 

     On April 4, 2019, this characteristic of the Litecoin platform reached an all-time high and surpassed the previous indicator recorded at the end of spring 2018. The total capacity of the system was 359.43 TH / s, while just under a year ago, these recorded data were equal to 342.88 TH / s.

     According to experts, this event reveals a clear paradox, because with an increase in the network capacity, the number of participants grows, that is, a higher production rate and, accordingly, the supply volume should be achieved. But the more coins, the lower their value. Therefore, it is not completely clear how this could happen. The most striking thing is that the developers do not give a definite answer to what happened.

     As a rule, in the Proof-of-Work protocol, the hash rate depends on the price. That is, if the cost rises, then the same happens with this indicator. Moreover, it is the first that is the cause of stimulation, and not a consequence of what is happening. Therefore, the organizers called such a coincidence of a huge hash rate and a sudden rise in quotations "more efficient mining of coins." 

     Returning to the topic of Litecoin halving, it is worth mentioning that during the entire period of its activity, this procedure took place twice in this network. The algorithm, written into the coin code on August 25, 2015, halved user income for the formed block - from 50 LTC to 25 LTC, and the second cut, which took place on August 5, 2019, from 25 LTC to 12.5 LTC. The next reorganization will reduce the block reward to 6.25 LTC. It is tentatively expected at the beginning of August 2023. Litecoinblockhalf reports that about 75% of the total asset supply of the resource has been mined so far.

     LTC is based on the lions share of the BTC program code, they implement similar mechanisms. However, cryptocurrencies have a number of significant differences. The emission of Litecoin coins is limited to 84 million. This is 4 times more than the maximum supply of Bitcoin. Accordingly, the cut in coin income on the network differs four times from the BTC network - every 840 thousand blocks against 210 thousand, but after the same period of time. The same interval is justified by the fact that the block mining speed in the Litecoin network is only 2.5 minutes, which is 4 times faster than in the Bitcoin network.

     Litecoin reacted differently to the cut than BTC. A few days before the first halving, there was a revival, the LTC rate rose from $ 2 to $ 7. Before the second cut in reward in half, Litecoin also showed good growth. In a few months, the price of Litecoin has grown from $ 27 to $ 127.

     Due to the last transition after August 5, significantly less LTC will enter the market. In preparation for that, the cryptocurrency doubled in value in the first quarter, from $ 30 on January 1 to $ 61 at the end of March. Quotes after the first procedure in August 2015 showed a significant increase of 400%. However, according to Charlie Lee, the founder of this cryptocurrency, the growth of the rate is not guaranteed due to the predictability of the situation. That is, if everything is about the changes initially, then their consequences are included in the existing price of coins.

     There are concerns that the last halving of the resource will negatively affect the level of security. However, the rating agency "Weiss Rating" assigned the site a good rating. Cryptographic experts expect that, like the Bitcoin rate, the rate of this platform will show growth after cutting rewards. So, compared to December 2018, quotations increased by almost 300%. Observations showed that miners were very active in their quest to get more Litecoins before the change. So on July 15, the firms hash rate reached its all-time high. But the founder believes that such actions are a shock to the system and therefore makes a pessimistic forecast for the asset price and the speed of transaction confirmation before adjusting the mining difficulty. However, after halving the remuneration for litecoin miners and adjusting the inflation of the digital currency and its supply, the coin becomes more scarce, which automatically means an increase in the value of the asset.

Why does Litecoin need this?

     Halving is a significant underlying factor affecting the value of assets before, during and after the procedure. It also radically affects the networks miners, as it directly affects the profitability of their operation on the site. So, halving that has come at a certain moment, immediately reduces the profit for the mined block by 50%. At the same time, it proportionally reduces the profitability of mining cryptocurrency. The profitability of mining is easily calculated by dividing the number of units mined per day by the difficulty indicator.

     Theoretically, the cost of Litecoin on the eve of modernization can rise to such a level that it more than compensates for the halving of the reward. Then users will have an economic incentive to work with this particular cryptocurrency.

     Halving significantly affects the growth rate of the market supply of Litecoins, thereby reducing the risks of depreciation. The procedure parameters (frequency, specific block, and so on) are clearly indicated in the program code, which makes the monetary policy of cryptographic assets predictable.

     Observations of the processes during the previous, first halving, which took place in August 2015 at block 840,000, allow us to draw several important conclusions that have a long-term perspective:

1. An impressive rise in the value and price volatility of Litecoin before the reward halves. Then Litecoin reached an all-time high, stopping at $ 7.
2. Minor hashrate upgrade. Despite the deteriorating economic incentives among the miners, the hash rate worsened by only a few weeks, and later recovered to previous values.
3. Short fluctuations in mining profitability were quickly balanced out by the overall rise in asset value. Experts have noticed that the price of digital currency is the basis of the profitability of its production.

     Litecoin founder Charlie Lee is skeptical and pessimistic, predicting a decline in the coins quotes after the halving in the long term. However, he may be wrong. In addition to this procedure, other factors of price formation came into play, and therefore various options for the development of events are not excluded:

• the price will continue to grow along with the profitability of mining;
• the hashrate will continue to grow, which will affect the profitability of Litecoin mining;
• a decrease in the number of users and, as a consequence, a decrease in the cost of LTC and hashrate.

     Be that as it may, only time can show how the situation with respect to BTC and LTC in the cryptocurrency market will develop and whether they will return to their maximums.

     But, despite this, experts recommend not to make big bets on halving, because there is an example of 2015. At that time, the procedure took place on August 26, and the asset showed peak readings already in July, after which the price of quotes rapidly went downhill.

Halving Bitcoin

     The procedure is the same as with the previous currency - once every 4 years. There have already been two attempts to cut user rewards:

• November 28, 2012 (profit decreased from 50 to 25 BTC);
• July 9, 2016 (the remuneration was reduced from 25 to 12.5 BTC).

     According to research data from Binance Research, 3 months before the first procedure, the cost increased by 18%, and within 90 days after the procedure - by 141%. That is, the decrease in profitability was of a short-term nature. This is due to the rapid compensation for the growth of quotations after the halving date.

     As for the second halving, three months before that, the cost increased by 54%, but at the end of the procedure, profitability did not go up as expected by the developers. Cryptographers attribute this to the fact that the complexity of calculations has increased, which has led to the outflow of users to other currency resources.

Waiting for the next Bitcoin halving

     In 2020, experts expect the next Bitcoin halving or halving of the reward for miners for adding a transaction to the blockchain of the leading cryptocurrency. It will take place at block 630,000.

     The algorithm put into the code without any external assistance in 2020 will instantly reduce the amount of remuneration to the miner for each closed block from 12.5 BTC to 6.25 BTC. Along with a decrease in the amount of remuneration, the annual inflation rate of the cryptocurrency is expected to fall from 4% to 2%. If today miners mine 1,800 BTC per day, then after halving this amount will be reduced to 900 BTC. This halving occurs every four years.

     The upcoming 2020 halving will be the third in bitcoin history. The first of them took place in 2012, when the amount of remuneration fell from 50 MTC to 25 MTC. Some miners didnt like this, and they tried to resist adding blocks to the chain based on their own rules, in which the size of the reward was not reduced. However, the wider community did not accept this fake bitcoin. A year later, the cryptocurrency rate reached its all-time high and was above $ 1,000.

     Up to 12.5 BTC, the amount of remuneration was halved in mid-2016, during the second halving. Contrary to some expectations, miners adopted the new rules without any incidents.

     Bitcoin halving next year is causing discussion right now. Some expect an increase in the price of cryptocurrency (up to the extreme $ 10 million, as predicted by the Whats On Crypto channel), others expect that the effect of reducing inflation, if any, will be insignificant, since market participants have information in advance and will adjust their strategies to certain way.

     A decrease in remuneration to miners to 3.125 BTC is expected from March to June 2024 at block 840,000. And until the last coin, approximately in 2140, about three dozen rewards in the Bitcoin network will be halved.

The influence of halving on the price of the first coin

     The process itself directly affects the quotes of the site. So the famous crypto investor and programmer Vijay Boyapati on his page in social networks explained in detail the relationship of these two factors. Areas of influence can be divided into the following points:

1. Mining assets on the Bitcoin platform is a marginal business. This is due to the fact that users have to sell most of the mined coins as compensation for their own costs for the work done (checking, streamlining financial transactions).
2. The value of the worlds first digital coin is under constant and strong pressure from user sales. The quotation price will go down without new investments to remove this influence.
3. As a consequence of the HYIP cycle, Bitcoin was monetized. In the cryptocurrency market, demand is many times greater than the selling pressure created by the networks clients. However, at the end of the cycle, the influence of miners increases due to concerns of investors. 
4. The cycle in the completion phase shows the weakening of the pressure of the miners against the background of the growing pressure from the holders who understand the value of coins in the long term. Due to this, temporary stability of the rate is achieved, which is subsequently violated by halving, which halves the pressure on sales.
5. After the profit is cut, the demand of the holders is greater than the supply of the miners, which contributes to the growth of the value of the resources assets. This inevitable rush of new users is triggering a rising price trend.

     According to the experience of previous work, analysts claim that halving begins to influence the foreign exchange market in the area of an upward price trend in about one year. The current situation is quite predictable, therefore, specialists in the sphere believe that in the future everything will be carried out much faster. They also do not exclude attempts to speculate on the part of the miners, especially before the halving. However, as a rule, after the destabilization of the value in anticipation of the procedure, there is a constant rate time and real active growth of the coin.

How else can the price of Bitcoin mining grow?

     With each block of the chain formed, the complexity of the network increases, and the reward decreases. At the same time, the cost of the mining process itself is also growing, which affects the increase in the market quotation of cryptocurrency coins. As a result, the amount of remuneration will be completely equal to zero and users will be able to earn only from a secondary source of profit, which is presented in the form of servicing financial transactions. The security of the system supported by the miners plays a significant role in the value of the asset.

     The decentralized digital currency system is set up so that the amount of money mined is limited. It cannot, like central banks, freely issue fiat currencies. As a result, the coin becomes scarce and valuable in the market, and halving eliminates the possibility of its depreciation. Bitcoin becomes equivalent to gold, because the demand for it grows as the final amount of the stock of an asset in the world is reached. According to forecasts, the last Bitcoin coin should be released in 2140. But the next halving reminds that the stock is depleted, and the number of currency is limited. This has always resulted in an increase in the value of the main cryptographic currency and attracted new users to the network. 

     In addition, today there is an increase in peoples interest in the digital world of currencies. Therefore, under the conditions of the created shortage of virtual money, the demand and cost will most likely increase. And statistics confirm this. After two procedures for cutting rewards, about a year later, the price of cryptocurrencies soared to an all-time high.

• after the first halving in 2012, the quotes were $ 1,000;
• after the second halving in 2016, the value of the coins reached $ 20,089.

     Of course, earlier, in addition to halving the premiums, many other factors influenced the cryptocurrency rate, but one should not exclude from this list the causal relationships observed between the rise in the price of coins and the gradual cut in profit from mining by 50%.

     Based on the foregoing, we can draw a conclusion regarding the halving of this cryptocurrency. The miners of this site have a fairly large profit from transaction fees, so a decrease in mining profitability will not have a sufficiently impressive impact on the Bitcoin project. The worlds first digital currency has a lot of adherents who are not only aimed at increasing earnings, but also support the ideology of the system itself. In this regard, even halving the reward will not lead to a drop in quotes, which is typical only for Bitcoin. After all, the rest of the coins of the market do not enjoy such trust of users, and therefore the risks of a complete loss of interest of miners are much higher.

     Experts believe that the race for assets in the light of the upcoming halving has already begun. So, according to analysts forecasts, Bitcoin quotes will slowly rise throughout the year before cutting. And therefore, it is advisable to think about investments now, since there are a lot of people who want to purchase a digital asset.

Halving ETH

     HALVING this cryptographic currency is a little more complex and non-standard than the previous examples. This is because, despite the use of the Proof-of-Work protocol in the system, the founder of the project, Vitalik Buterin, aims to change the network and integrate the PoS algorithm into it. In connection with this modernization course, cuts in premiums to earners in Ethereum are controlled manually at the time of each upcoming update as part of a large-scale program. It is more difficult to assess the reaction of investors to such a “fork” than to calculate the consequences of cutting remuneration to miners. This is due to the fact that the assessment of investors depends on the success of the modernized innovations themselves.

     Making money on halving this cryptocurrency is not easy. This is due to the fact that there are a number of difficulties:

1. The stock market for cryptocurrency assets is difficult to predict. In addition to the halving procedure itself, it is necessary to take into account other important nuances: the degree of mining complexity, the size of commissions in the mining system of the miners, and so on. Indeed, despite the identical algorithm of the PoW protocol, the policy of the developers is very different. So, for example, in Ethereum even the Roadmap changes, which is not typical for other sites.
2. Cutting the reward in half is a local procedure, since it is carried out for a specific separate cryptocurrency platform. While Bitcoin is the leading and flagship product in the entire market, it will continue to set the trend and the tone of innovation. Therefore, the halving of other coins like Ether and even Litecoin can simply get lost in the general trend in the sphere.

     At the same time, the developers and analysts themselves sometimes cannot explain why the cost has changed. They argue this with the upcoming halving, but make this statement ambiguous. Therefore, this type of investment based on forecasts is a risky business. 

The effect of the halving procedure

     In the long term, halving the reward affects the number of miners who receive coins for mining blocks. Some of them, after another cut, conclude that the costs of mining (electricity and computing power) and radically reduced income are incomparable. It seems that as a result of halving, crypt mining becomes less cost-effective. But this is not true, since halving the reward triggers other processes, which, in fact, are incentives for the growth of the price of the cryptocurrency. 

     Cutting profit from mining also contains several important effects:

• extending the functioning of the reward system and postponing the issue of the last coin;
• creating a deficit of a coin and increasing it in price due to limited supply;
• an increase in the cost of mining BTC and the complexity of the network.

     To achieve this result, the developers are implementing the protocol into the systems of the most popular cryptocurrencies on the market. 

New generation of ASIC miners

     If we consider halving of digital assets from the point of view of miners, then a decrease in income from block formation by half using the same computing power of equipment is a negative phenomenon. On the other hand, this phenomenon encourages coin miners to improve and develop their technical base.

     To help miners, leading companies in the production of special equipment on the eve of halving 2020 are talking about the release of devices S17 and T17, which will be integrated with a 7nm chip. The new equipment is one third more efficient, has a low level of electricity consumption, which will make currency mining more profitable. Counting on the rise in the price of cryptocurrency after halving, the management of the companies is confident in a new surge of interest in mining devices.

     The Bitfury Group, a digital asset mining software maker, has already launched the first version of a new generation of Bitcoin mining hardware. The equipment is based on the Bitfury Clarke ASIC chip, which provides coin mining based on a specific hashing algorithm. That is, such elements have their own characteristics for solving certain problems.

 

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