BANGKOK, THAILAND – MAY 14: A woman poses with a Bitcoin mascot during the Thailand Crypto Expo 2022… [+] on May 14, 2022 in Bangkok, Thailand. Cryptocurrency enthusiasts attend Thailand Crypto Expo 2022, Southeast Asia’s largest cryptocurrency expo, at the Bangkok International Trade and Exhibition Center. Visitors learn about blockchain projects, exchanges, mining, NFT production and gamefi technology. The exhibition takes place during a global market crisis. (Photo by Lauren DeCicca/Getty Images)

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If “The Halving” is coming to your media stream for the first time, fear not, it’s not as complicated as you might think. Simply put, the rewards given to those who verify and validate transactions in Bitcoin
Bitcoin
blockchain are being cut in half. This happens approximately every four years and is part of Bitcoin’s design, helping to gradually reduce the rate of introduction of the cryptocurrency to combat inflation.

This is the fourth halving event. Previous halvings took place in 2020, 2016 and 2012. Before this latest event, the reward for each Bitcoin block was 6.25 BTC. Afterwards, the reward will be 3,125 BTC. In addition to combating inflationary effects and maintaining scarcity, many expect the price of Bitcoin to increase as supply will be reduced. This would continue to encourage miners to verify transactions and make them immutable. Alternatively, and quite feasibly, a significant drop in the price of BTC after the halving could harm miners and slow down the network, which has recently been running at record speeds.

There will be more halves in the future. Expect to read about this event again in early 2028. At that point, the reward will drop again to 1.5625 BTC per block. This will continue until around the year 2140, when mathematicians predict the last Bitcoin will be mined. That’s because there are only 21 million Bitcoins and there can never be more. Unlike the US dollar, Bitcoin is deflationary in nature.

BATH, UNITED KINGDOM – NOVEMBER 05: In this photo illustration, a new Bitcoin token is… [+] photographed on a US dollar bill, on November 5, 2023 in Bath, England. (Photo by Matt Cardy/Getty Images)

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“Most people outside of bitcoin don’t understand what halving is or the role it plays, said Danny Scott, chief executive of cryptocurrency platform CoinCorner. The Independent. “Halving helps to naturally increase the price due to supply and demand in a medium to long term perspective, which in turn attracts new people as the price increases past previous highs. Thus, indirectly, it plays an important role in shaping investor sentiment and market speculation.”

Impact on the Industry: Beyond Bitcoin

Given Bitcoin’s leading role in the world of cryptocurrencies, representing over 50% of the entire chain’s value, when something happens to BTC, the snowball effect is almost always immediate and noticeable. Often, Bitcoin is at the end of a chain reaction of external events, which ultimately affect its price. Its price then changes, and this causes a ripple effect on the market. There is a back and forth. A halving is different from a typical price fluctuation because, for the first time in four years, the catalyst is the design of Bitcoin itself.

Altcoins (alternative currencies), essentially any cryptocurrency other than Bitcoin, should receive a knock-on effect from the halving. The interconnectedness of Bitcoin and altcoins goes far beyond price correlation. The ramifications are much deeper than that.

Much of the relationship involves trust and feeling. When confidence in Bitcoin is high, money leaves altcoins and goes into BTC, and vice versa. When people are stockpiling Bitcoin in large quantities, as we saw with the recent Spot Bitcoin ETF enthusiasm, the entire market can benefit from inflows of new investors.

Fed up with price and sentiment correlation with Bitcoin, many Layer 1 and Layer 2 blockchains try, by design, to prevent their native tokens from being pegged to BTC. These projects have designed their blockchain networks and protocols differently, creating innovative smart contracts and offering permissionless ways to support transaction ownership and settlement. Still, despite their best efforts, they will almost certainly be affected by the halving.

Another impact, in addition to Bitcoin, or more precisely, on top of Bitcoin, could come from Runes. Launched by the creator of Bitcoin’s Ordinals protocol (essentially NFTs on Bitcoin), Runes introduces a new fungible token standard to rival BRC-20. Runes DEX just received $2 million initial investment for your work.

“Runas represents an innovative evolution in the Bitcoin scene. Its intricate design and seamless functionality pave the way for a new era of digital commodities in the realm of cryptocurrencies. As Bitcoin redefines the boundaries of innovation, Runas is a testament to its lasting legacy,” was a quote taken as significant from Blog post by Jonathan Jungers on Linkedin.

Runestone fragment at Mariefred, 1969. (Photo by Erich Andres/United Archives via Getty Images)

Erich Andres/Arquivos Unidos via Getty Images

As Bitcoin mining rewards are reduced, people will turn their attention elsewhere, and the launch of Runes, timed to coincide with the halving, is a strategically timed project that I think many will pay close attention to. If ordinals are NFTs, then runes are like normal tokens, except they are very easy to make and launch. Could they start a wave of Bitcoin-backed meme coins? Perhaps.

Casey Rodarmor, the brains behind Ordinals and Runes, noted in X: “The value proposition of crypto is tokens, NFTs and AMMs. Bitcoin now has inscriptions, a superior NFT
NFT
pattern, and then runes, a higher symbolic pattern. Soon there will also be something superior to AMMs.”

L1s and L2s: Collateral damage

Layer 1 blockchains are the core infrastructure behind blockchain technology. Bitcoin is the biggest, followed by Ethereum
ETH
BNB
BNB
Solana
SUN
and curl. Layer 2 blockchains sit on top of an L1. They typically act as a clever way to alleviate congestion on the Layer 1 blockchain by diverting transactions to save time, money, and energy. Some great L2s include Polygon
MATIC
built on Ethereum, the Lightning Network, built on Bitcoin, and Dymension
DYM
built in the Cosmos.

Sandeep Nailwal, Co-Founder and CEO of Polygon, speaks during ETHDenver on… [+] Denver, Colorado, USA on Friday, February 18, 2022. ETHDenver is the world’s largest Web3 #BUIDLathon for Ethereum and other blockchain protocol enthusiasts, designers, and developers. Photographer: Chet Strange/Bloomberg

© 2022 Bloomberg Finance LP

Although L2s helped L1s, they came to be seen as enemies or competitors. Layers 1 have different values ​​(security and decentralization) than Layers 2, which prioritize scalability and savings. Then there are Layer 3s, which go further, building specialized bridges over Layer 2 to increase efficiency and customization for decentralized applications. This is where many of the most exciting innovations are occurring right now and where the revolutionary developments are likely to come from. The halving, however, poses an existential threat.

If the halving causes Bitcoin to fall, it would destabilize most other L1s with downward price action and selling pressure, weakening their treasuries and affecting investment in the ecosystem. Network activity will drop, making L2s quieter, less able to profit from transaction fees and also reduced treasuries. The recession of L1 and L2 would leave L3 hanging by a thread, with little interaction, income or interest, theoretically.

Likewise, if the latest Bitcoin halving starts another bull run and the price rises, funds will likely exit L1s, L2s, and L3s in favor of BTC climbing. Still, this is a much better outcome, as billions of dollars of new investment will enter the industry, and when Bitcoin eventually stabilizes or investors take profits, funds will return to L1s, L2s, and L2s – where both great innovation may occur.

Halving is a pivotal moment for Bitcoin

The halving is a significant moment and a milestone for Bitcoin, the after effects will show us how robust the other side of the crypto world is. We have seen altcoins and their respective blockchains represent around 50% of the total market capitalization, while also representing well over 50% of the big ideas, pioneering developments and talented workforce.

PARIS, FRANCE – JANUARY 11: In this photographic illustration, a visual representation of the digital… [+] Bitcoin cryptocurrency is displayed in front of a Bitcoin course chart on January 11, 2024 in Paris, France. The first American Bitcoin ETF was authorized by the SEC (Commissioner of the American Stock Exchange) on Wednesday, January 10, 2024. About ten of the world’s largest financial asset managers filed an application with the SEC to launch a Bitcoin. ETFs. After blocking bitcoin from entering Wall Street for more than 10 years, the Securities and Exchange Commission (SEC) has given the green light to exchange-traded funds (ETFs) invested in bitcoin. (Photo illustration by Chesnot/Getty Images)

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Whatever happens to the price of Bitcoin as a result of the halving, I want to continue to see collaboration, interoperability, and new user-friendly layers being built on top of L1s and L2s. The important thing is that crypto continues to evolve and move away from the price of Bitcoin. The best way to do this is to continue to build sustainably, solve problems and develop communities. At the same time, I think we will see consolidation at the L2 and L3 level, which may not be such a bad thing, allowing their talent to refocus and contribute to more viable projects.

Disclaimer: This information is for educational purposes only and should not be considered financial or investment advice.

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