Bitcoin Halving Explained: What it means and its impact on the Indian Investors

While May 11th was considered to just another day, it was a crucial day for Bitcoin users around the world. This event occurs once every four years and reduces the rate of new Bitcoin production by half. Before diving into the significance of this event let us get a basic introduction to Bitcoins.

While May 11th was considered to just another day, it was a crucial day for Bitcoin users around the world. This event occurs once every four years and reduces the rate of new Bitcoin production by half. Before diving into the significance of this event let us get a basic introduction to Bitcoins.

How did it all start?

In 2009, an anonymous person who went by a pseudonym launched a whitepaper and followed it by the launch of bitcoin software as open-source code. Since then, Bitcoin has become one of the most sought-after assets in the investment community. The current market capitalization is well above $160 Billion for Bitcoin alone. 

Bitcoin can be described as an email version for money/Gold. Bitcoin is used to describe both the network as well as the unit of the asset used by the network. The network is open-source, decentralised and not controlled by a single entity. It is like the digital version of Gold, with the total supply limited to little less than 21 million Bitcoins by math. Bitcoin can be sent by one user to another on the peer to peer network without the need for any intermediaries.

What is Bitcoin halving?

Ever wondered what makes Gold a valuable and safe asset to invest in? Imagine if suddenly there is a heavy increase in the supply of Gold on Earth. Will it be as precious as it is now?

Roughly 2,500 to 3,000 tons of new gold is mined each year with the total amount of Gold above the ground stands at just over 190,000 tons (two-thirds has been mined since 1950.). There is so much demand for Gold each year that the newly mined Gold is not enough and 25% of its demand is fulfilled by recycled gold from old jewellery. This constraint in supply is one of the key reasons that investors choose Gold to store their wealth, as they understand it is not going to be devalued due to oversupply.

Let me take the help of Gold to explain the halving of the so-called digital gold, the Bitcoin. Imagine a hypothetical planet called “Planet Digital”, where they have found their first and only Gold mine of the planet. Planet Digital has a limited supply of Gold, just like Earth. This single gold mine during its entire lifetime can just give 21 Million Gold Coins. 

To make sure that the limited supply of Gold does not get mined soon and stays with only limited individuals, the government of Planet Digital comes up with a plan to systematically bring in the supply of Gold to the ecosystem. To enable this, they devise a puzzle machine. Whenever someone solves a puzzle in the machine, the government allows that person (referred to as miner) to dig out 50 coins as a reward for solving the puzzle. 

Since it is the first time that this kind of a gold mine has been discovered, there is lesser information around it and hence reduced demand. But as time goes by the interest around the gold increases with an increase in its value. Therefore, it is not necessary to give 50 coins as a reward for solving the puzzle. The government reduces the reward to 25 coins. To bring it into a system, the government decides that after every 210,000 puzzles that get solved, the coins rewarded per puzzle will be reduced by half. So, from 50 coins, it will get reduced to 25, then to 12.5 and so on till the last coin that can be mined. 

In the Bitcoin world, there can be only 21 million Bitcoins that can be mined just like the single Gold mine in Planet Digital. Here Miners are rewarded with Bitcoins whenever they find a Block just like the way miners solved puzzles on the planet digital for the reward. After every 210,000 blocks, the Bitcoins that are rewarded to the miner gets reduced to half, and this event is called Bitcoin halving. 

Why is Bitcoin Halving Important?

The halving that occurred on May 11th, 2020, is even more special in the sense that every other Fiat currency, especially Dollar, is going through a printing spree, while Bitcoin will go through a “Quantitative hardening.” This would be in complete contrast to the macro trends and makes speculators bet hard on a price increase. The price of Bitcoin is already up by 40% this year while every other investment product is struggling to stay in the positive territory.

Bitcoin has been one of the most difficult assets when it comes to forecasting its price. While it is hard to pin price movements of decentralized currency to specific events, the first and the second halving were followed by significant increases in Bitcoin's exchange rate. The bitcoin price rose from $2 to beyond $1,000 during the days after first halving, while the price increased from a meagre $645 to just shy of $20,000 in the months that followed second halving. The bull run in 2017 brought many new users, applications, and awareness of the Cryptocurrency Ecosystem. We must wait and watch how Bitcoin will behave in the months following the third halving. Regardless of the price increase or decrease, this event has obtained the attention of many observers.

What’s in store for the Indian investors

For Indians, the Supreme Court judgment couldn’t have come at a better time. All the obstacles have been removed and now there are no restrictions in the purchase of Cryptocurrencies. Customers can make their first purchase in less than 2 minutes. We are expecting millions of Indians to join the Bitcoin mania post Bitcoin halving.

With 87.5% of total Bitcoins already mined, we expect the reduced supply to put strong upward pressure on Bitcoin price.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

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