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Bitcoin split : all you need to know

 


What is a bitcoin split?
The last bitcoin mining reward bitcoin split occurred on May 11, 2020.

Below is an explanation of the halving process, and how the Bitcoin network works.

Behind the basic Bitcoin currency, blockchain technology, the blockchain network is essentially based on a group of computers, or nodes, that run the Bitcoin software. These connected devices contain a partial or complete record of the transactions that occur on the network.

Each complete node contains the complete history of Bitcoin transactions, and is also responsible for approving or rejecting a transaction in the Bitcoin network.

To do this, the node runs a series of checks to ensure that the transaction is correct.

This includes ensuring that the transaction contains the correct validation parameters, such as disallowed tokens, and does not exceed the required length.

A transaction occurs only after it is approved by all parties operating in the Bitcoin network within the block in which the transaction is located.

After approval, the transaction is appended to the existing blockchain and broadcast to other nodes.

The blockchain acts as a pseudonymous record of transactions (i.e. its contents are visible to everyone but it is difficult to identify the transacting parties in the network).

This is because the blockchain assigns encrypted addresses to each transacting party in the network.

However, even those who are not participating in the network as a node or miner can see these transactions happening live by looking at block explorers.

Therefore, more computers or nodes added to the blockchain increases the stability and security of the network.

There are currently more than 9,704 nodes that are estimated to run bitcoin code while anyone can participate in the bitcoin network as a node, as long as they have enough storage space to download the entire blockchain and their transaction history, not all of these nodes are miners.

Bitcoin mining:
Bitcoin mining is the process in which people use their computers to participate in the bitcoin blockchain network as a processor and validator for transactions.

Bitcoin uses a system called Proof of Work (PoW).

This means that miners have to prove that they put in an effort in processing transactions in order to be rewarded.

This effort includes the time and energy required to operate computers and solve complex equations.

Faster computers with certain types of hardware produce larger block rewards and some companies have designed computer chips designed specifically for mining.

These computers are tasked with processing bitcoin transactions and are rewarded for doing so.

The term mining is not used in the literal sense but is used as a reference for the method of collecting precious metals.

Bitcoin miners solve math problems and confirm the legality of the transaction.

Then they add these transactions to a block and create chains of these transaction blocks, forming a blockchain.

When the block is filled with transactions, the miners who processed and confirmed transactions within the block are rewarded with bitcoin.

Transactions with greater monetary value require more confirmations to ensure security.

This process is called mining because the work done to get new bitcoins out of the code is the digital equivalent of the physical work done to pull gold out of the ground.

Bitcoin split:
After every 210,000 blocks are mined, or roughly every four years, the block reward given to bitcoin miners to process transactions is halved.

This reduces by half the rate at which new bitcoins are released into circulation.

This is bitcoin's way of using a synthetic form of inflation that halves every four years until all bitcoins are issued and traded.

This system will continue until about the year 2140.

At this point, miners will be rewarded with a transaction processing fee that will be paid by network users.

These fees ensure that miners still have the incentive to mine and keep the network running.

The idea is that the competition for these fees will keep them low after the split ends.

The halving is significant because it represents another drop in the dwindling limited supply of Bitcoin.

The maximum total bitcoin supply is 21 million bitcoins.

As of May 2021, there are about 18.7 million Bitcoins already in circulation, with only 2.28 million left to be issued via mining rewards.

In 2009, the reward for each block was 50 bitcoins.

After the first halving, the reward was 25, then 12.5, and it was 6.25 bitcoins per block as of May 11.

To put this in another context, imagine if the amount of gold mined from the earth was cut in half every four years.

If the value of gold depends on its scarcity, then “cutting” gold production by half every four years will theoretically cause its price to rise.

The effect of the Bitcoin split:
The Bitcoin mining fork can have some repercussions for investors because other assets with low supply, such as gold, can have high demand and push prices higher.

In the past, the bitcoin fork has been associated with massive spikes in the price of bitcoin.

The first fork, which occurred on November 28, 2012, saw the bitcoin price increase from $12 to $1,207 on November 28, 2013.

The second Bitcoin split occurred on July 9, 2016.

The price at this split was $647 and on December 15, 2017, the bitcoin price rose to $19,345.

The price then fell over a year from that peak to $3,255 on December 15, 2018, 403% higher than its price before the halving.

The last split occurred on May 11, 2020.

On that date, the price of Bitcoin was $8,821. On April 12, 2021, the price of Bitcoin soared to $63,558 (a staggering 651% increase over its pre-halving price).

A month later, on May 11, 2021, the price of Bitcoin was $49,504, which is a 461% increase which seems moreConsistency with the behavior of the half in 2016.

On May 12, 2021, Tesla CEO Elon Musk announced that Tesla would no longer accept bitcoins as payment, which led to more price swings.

In the week following Musk's comments, the price of bitcoin fell below $40,000 after Chinese regulators announced restrictions preventing financial institutions and payment companies from providing cryptocurrency-related services.

Although these two announcements caused a temporary drop in the price of Bitcoin, there is a possibility that the price fluctuations are more related to the halving behavior that we observed earlier.

The halving theory and the chain reaction from which it proceeds operate as follows:

The bonus is halved - half inflation - low available supply - high demand - high price.

In the event that the fork does not lead to an increase in demand and price, miners will have no incentive because the reward for completing transactions will be smaller and the value of Bitcoin will not be high enough.

To prevent this, Bitcoin has a process to change the difficulty it takes to obtain mining rewards, or in other words, the difficulty of mining transactions.

In the event that the reward is halved and the value of Bitcoin is not increased, the mining difficulty will be reduced to keep the miners motivated.

This means that the amount of bitcoin issued as a reward is still smaller but the difficulty of processing the transaction is reduced.

This process has proven to be successful twice.

So far, the result of these divisions has been price inflation followed by a significant fall.

However, the crashes that followed these gains have kept prices higher than they were before the halving events.

For example, as mentioned above, the 2017-2018 bubble saw Bitcoin rise to around $20,000, only to drop to around $3,200.5, which is a huge drop but the price of Bitcoin before the halving was around $650.

While this system works so far, the half is usually surrounded by massive speculation, noise, and volatility, and it is unpredictable how the market will react to these events in the future.

This process has proven successful in the first two halves, and in observing price trends since the third halving in May 2020, it appears to be consistent.

So far, the result of these divisions has been price inflation followed by a significant fall.

However, the crashes that followed these gains have kept prices higher than they were before the halving events.

It is noteworthy that the third halving occurred not only in a global pandemic, but also in an environment of heightened regulatory speculation, increased institutional interest in cryptocurrencies, and celebrity hype.

Given these additional factors, it remains unclear where the Bitcoin price will eventually settle in the aftermath.
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