Unlike fiat currencies like the Dollar or the Euro, the supply of Bitcoin doesn’t depend on a central authority that prints as much as it wants.
When Bitcoin was created in 2008 by Satoshi Nakamoto, he set the maximum supply of Bitcoin to 21 million. To ensure the stability of the currency and prevent inflation, Satoshi came with a way to distribute new Bitcoin gradually.
Bitcoin miners are responsible for validating transactions on the Bitcoin blockchain, and are rewarded with new Bitcoin for doing so.
When it all started, the reward was set at 50 BTC per block. However, Nakamoto added to the protocol a rule where every 210,000 blocks, which is roughly every four years, the reward will become half.
The Bitcoin halving 2020 is the third event of such kind. The first equal having took place in late 2012 at block number 210,000. At that time, the reward was reduced from 15 to 25 BTC per block. The second event occurred in mid-2016 at block 420,000, and it reduced the reward to 12.5.
Now will this process ever stop? Of course! Bitcoin halving will continue until sometime near the year 2040, when all 21 million Bitcoins are mined.
Why our Bitcoin halvings so important? Well as I quickly mentioned before, these events are meant to control the supply of new Bitcoins and to control its value. Imagine if all BTC was suddenly mined at once, that would create a disequilibrium between supply and demand, and thus hurting the value of the currency.
Now let’s get to the interesting part – how Bitcoin halvings actually affect the price of Bitcoin. By the time of the first halving in 2012, Bitcoin traded at $11 per unit. Only a year after that event, it jumped to a peak of $1,100. The second halving met Bitcoin at nearly $800, and a year and a half later, the currency reached a record high of $20,000.
So will that pattern repeat? Well, there is no certainty about it. Many analysts suggest that it might, because of the supply-demand balance. Others rely on something called the stock-to-flow price model, and according to it, Bitcoin could reach a value of $288,000 following the third halving. Needless to say, this wouldn’t happen overnight and it might take some time to get there.
With all of this in mind, you can take your chances and try to profit from this particular event. Of course, you have to be very careful since the cryptocurrency market is highly volatile.