What is bitcoin halving?
3 min read
The available supply of conventional currencies rises and falls under the watchful eye of national central banks, but the total supply of bitcoin is fixed and unchanging.
One of the most important features of bitcoin is its limited supply and issuance mechanism. There are a total of 21 million bitcoins in the world, with just under 2 million left to create. The bitcoin protocol automatically reduces the number of new coins issued with each new block, in a process called halving or halving.
What is bitcoin halving?
Bitcoin halving is when the reward for mining bitcoin is halved. Halving occurs every four years.
The halving policy was built into the bitcoin mining algorithm to counter inflation by maintaining the deficit. Theoretically, lowering the rate of bitcoin issuance means that the price will rise if demand stays the same.
Currently, bitcoin inflation is less than 2%, and it will come down with further cuts. That looks pretty good compared to the 9.1% year-over-year inflation in June’s Consumer Price Index (CPI).
Bitcoin’s mining scarcity defines its finiteness, and when rewards fall, supply is constrained. Increased demand at a time when supply is limited has a positive effect on price, which can make bitcoin attractive to investors.
How does Bitcoin Halving work?
A decentralized network of validators checks all bitcoin transactions in a process called mining. They are paid 6.25 BTC, which is currently about $148,000, when they are the first to use complex mathematical calculations to add a group of transactions to the bitcoin blockchain as part of the proof-of-work mechanism.
These transaction blocks are added about every 10 minutes, and according to the bitcoin code, the miners’ reward is halved after every 210,000 blocks are created. This happens about once every four years during periods that are often accompanied by increased BTC price volatility.
When did the first bitcoin halving occur?
The first bitcoin price halving occurred in November 2012. The next price drop was in July 2016, and the last one was in May 2020.
The reward, or subsidy, for mining started at 50 BTC per block when Bitcoin was released in 2009. With each new halving, that amount is halved. For example, after the first reduction, the reward for mining bitcoin dropped to 25 BTC per block.
There will be a total of 64 revaluations, the last of which will take place in 2140. At that point, 21 million BTC will be in circulation, and no more coins will be created. After that, miners will only be paid transaction fees.
Richard Baker, CEO of TAAL Distributed Information Technologies, which provides mining and blockchain services, notes that miners may shift BTC transaction processing capacity after the next halving, as they will look elsewhere for additional transaction fees to make up for lost bitcoin revenue. Fewer miners will mean less network security.
If economic theory is correct, and historically for bitcoin it is, bitcoin prices should rise sharply in response to supply demand. Although there is still debate as to whether the historical price movement around each halving was a direct result of halving. Higher prices will provide an incentive for miners to continue processing bitcoin transactions.
When will the next bitcoin halving occur?
According to Bitcoin’s algorithm, halving occurs after a certain number of blocks are created. No one knows exactly when the next halving will occur, but experts give an estimated date of May 2024. That would be almost exactly four years after the previous one.
The somewhat predictable nature of bitcoin’s halving has been designed to ensure it won’t be a major shock to the network, experts say. But that doesn’t mean there won’t be hype surrounding bitcoin’s next decline. Historically, bitcoin price volatility is seen before and after a halving. However, a few months afterward, the bitcoin price tends to increase significantly.
While there are many other factors that affect the price of bitcoin, it seems that halving events are generally favorable for the cryptocurrency after the initial volatility decreases. Experts say that investors should be cautious about the next bitcoin rate cut. While scarcity may drive up prices, a decrease in miner activity could lead to a leveling off of the price.
