What happens to bitcoin when the system undergoes upgrades?

Bitcoin (BTC) is a digital asset or crypto, the very first of its kind. Founded by Satoshi Nakamoto in 2008, bitcoin has since grown into a network with a market cap of $149 billion USD (at the time of writing) largely thanks to exchange and trading platforms like eToro. Bitcoin is built on a blockchain, a decentralized ledger that keeps track of all BTC transactions, across multiple computers in a peer-to-peer network. 

However, like any system, the bitcoin blockchain has to undergo changes. So what happens to bitcoin (BTC) when the system undergoes upgrades? How does it affect the price and functionality? That’s precisely what we’ll be exploring today!

Your capital is at risk. 

A bitcoin halving

A bitcoin halving (a form of system update) will occur after 210,000 blocks have been mined by the system. This has happened twice since 2009, with the most recent one happening in 2016 – and we’re just about due for another.

Essentially a bitcoin halving means that the rewards that bitcoin miners receive for validating transactions are reduced by 50%. So, after the last halving event in 2016, the blockchain went from mining 3600 BTC per day to mining 1800 BTC. In May 2020, only 900 BTC will be mined a day. 

Bitcoin price fluctuations

Historically, bitcoin price fluctuations have been intrinsically linked with bitcoin halvings. If we look back at November 2013, around a year after the first halving in November 2012, the BTC price reached $1000, an all-time high at that point. Then, in 2016, the second halving preceded December 2017, when BTC price peaked at a whopping $19,000. 

So, with analysts already predicting that bitcoin could reach over $20,000, and the third halving right around the corner, we may have something to look forward to. If history is set to repeat itself, we should be feeling pretty bullish about the upcoming year in crypto.

Your capital is at risk. Past performance is not indicative of future results.

Bitcoin’s functionality 

A halving is basically the way for the bitcoin network to deal with inflation. Since bitcoin’s total supply is capped at 21 million, the system has no natural way of dealing with inflation like traditional economies (devaluing currency because of excess supply). 

As the reward for mining lessens, more bitcoin miners will need to rely on the transaction fees they receive to cover their expenses. Unlike now, where transaction fees usually make up the profit that miners receive, while the BTC reward covers electricity and hardware maintenance (as well as other expenses). Once all 21 million coins have been mined, miners will only receive transaction fees. This means a massive drop in revenue, and could cause miners to shut down. Fewer miners will continue, and therefore the hashrate of the network will reduce how difficult it is to mine new blocks. 

So, what happens to bitcoin when the system undergoes upgrades? Well, in terms of functionality at least, things basically stay the same. Bitcoin has an almost natural way of balancing itself out, which is pretty special for an ecosystem of this nature. 

What can we expect from the next halving? 

Ultimately, if we look at the history of bitcoin halvings, we can pretty much expect for bitcoin’s price to go up and for the hashrate to increase too. As less miners are able to maintain their positions in the ecosystem, the difficulty of cracking the problem of mining new blocks will become simpler too. 

So, what happens to bitcoin when the system undergoes upgrades? If we look at the highs of December 2017, it could be topped in the upcoming year. What do you think? 

Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework. Your capital is at risk.