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A Halving Event, Also Known As Halving, Is The Moment When The Rewards For Verifying A Blockchain Network Are Halved. In The Case Of Bitcoin And Litecoin It Is The Miners Who Verify The Network, They Do So By Solving Complex Calculations That Produce The Proof Of Work Algorithm.
As Soon As The Halving Starts, They Will Thus Receive Half Less Bitcoins And Litecoins As Compensation For The Provision Of Large Quantities Of Digital Computing Power. Bitcoin And Litecoin Have A Halving About Every 4 Years. For Bitcoin It Takes Place After 210,000 New Blocks Have Been Produced, For Litecoin This Applies To Every 840,000 Blocks.
Note That The Halving Does Not Mean That The Total Number Of Coins Is Halved, It Only Applies To Newly Issued Coins.
Why Is There A Halving Event?
You may ask why it is necessary to halve the reward for the miners since they ensure that the network is safe? However, the reason for the halving is not intended to disadvantage the minorities.
Vitalik Buterin, the main developer of Ethereum, wrote an article for Bitcoin magazine in 2012 explaining why the halving is taking place. The article describes how Bitcoin is programmed to conduct an automatic monetary policy.
This monetary policy aims to prevent Bitcoin’s inflation. A frequently discussed risk of currency units managed by the central government is the risk of hyperinflation by printing large amounts of extra money. Buterin cites the historical examples of hyperinflation in the German Weimar Republic (1919-1933) and Zimbabwe in 2007.
In the meantime, we can also add Venezuela to this list, given the extreme devaluation of the Venezuelan Bolivar. Hyperinflation makes money worthless. A BBC article from 2018 showed that toilet paper in the South American country is now worth more than a stack of banknotes.
In Contrast To Currencies Managed By A Central Bank Or Government, Bitcoin Has A Deflationary Character. This Means That There Is A Limited Number Of Bitcoins To Produce And That The Bitcoin Becomes More Valuable The More It Is Used.
The Halving Of The Remuneration For The Miners Continues Until The Number To Be Halved Is So Small That The Bitcoin Code No Longer Allows A Halving. At That Point, No More Coins Will Be Issued. This Is Expected To Happen Around The Year 2140.
From That Moment On, Miners Will Only Have To Pay For Their Electricity Bill With The Charges That Can Be Received To Verify Transactions. Litecoin Is A Kind Of A Clone Of Bitcoin, And Is, Therefore, In The Same Way, Except For A Few Minor Changes, Such As Increasing The Number Of Coins In Circulation, And Has A Slightly Faster Network. The Prognosis Is That The Last Litecoin Will Have Been Mined Around 2150.
Increase in price, due to the halving?
An interesting side effect of halving events is that they usually involve an increase in the price per coin. One reason for a price increase is that there are simply fewer new coins, causing scarcity. Another reason that has been mentioned is that, in the run-up to a halving, the miners start working together and that they agree not to sell their coins in order to increase the price.
For example, the impact of halving their income is limited because the reward will simply be worth more. Finally, a halving event always creates the necessary hype; investors expect a price increase and buy the coins to make a profit.
The reason for a price increase
The real reasons for the price rise of new currencies like Bitcoin or Litecoin are often difficult to determine, but at least it seems that the halving plays an important role. As data, we can use the two halves that have taken place in Bitcoin’s network so far.
The first occurred on November 28, 2012, and the second on July 9, 2016. In both cases, the halving marked the start of a price run that pushed Bitcoin to great heights in the 12 months that followed, as shown in this graph. However, an open market often works quite effectively and can ensure that expected developments are factored into the price before they happen.
For example, who can see that the price of Litecoin has already risen sharply in the run-up to the upcoming Litecoin halving on August 7? From January 1, 2019, until the time of writing this article, the value of 1 Litecoin has increased by between 4 and 5 times.
So it remains to be seen what effect the halves of Bitcoin and Litecoin will have on the price this time. However, one thing is certain, no more than 21 million Bitcoins and 84 million Litecoins will ever be issued. Hyperinflation will therefore not be an issue with these crypto coins.
