Bitcoin Halving

Halving.

If you’ve been following up on Bitcoin, you’ve probably heard a bit about it. But what exactly is this Bitcoin Halving? When does it happen and why does it happen?

Let’s take it from the top. A common way to define Bitcoin is to call it the ‘digital gold’ and just like actual gold, Bitcoin is finite. This means that there is a limited supply of bitcoin in the world and one day, there will be no more new bitcoins. When that time comes, 21 million bitcoins would have been mined. Right now, over 18 million bitcoins have been mined so there’s still a couple million more for the taking.

The bitcoin protocol stated that for every time 210,000 blocks are mined, the amount of bitcoin given to miners as rewards would be halved. Every time you buy and sell bitcoin, those transactions can only take place because people from all over the world use computers with powerful computing power to solve mathematical problems to verify your transactions. The process of verifying these transactions is what is called mining.

In exchange for mining and verifying these transactions, miners get a small reward. Initially, the reward for miners was 50 BTC for each block mined. However, since its inception in 2009, there have been 3 bitcoin halvings. The reward was first halved to 25 bitcoin in 2012 then 12.5 bitcoin in 2016 and 6.25 bitcoin in May 2020. With fewer bitcoins being made available to miners, the supply of new bitcoins entering the market is reduced.

Halving was written into the Bitcoin code by its creator, Satoshi Nakamoto. The halving is done to control the supply. By issuing fewer bitcoins over time, it is more likely that the value of bitcoin will rise. If the coins are created too quickly in relation to demand, basic economics states that there would be surplus bitcoins in circulation and ultimately their price would fall.

Halving is what makes bitcoin scarce and scarcity creates value as long as the demand is stable. Bitcoin halving is a highly anticipated event because many people believe that it will lead to a price increase.

November 2012 was the first time bitcoin halved and the price began to rise shortly after the halving, increasing from $11 to $12 and then rising steadily all through the year and finally reaching $1,038 exactly a year after.

The next halving was anticipated and occurred in July 2016. That year, the price of bitcoin dropped but rose back steadily and then soared to almost $20,000 in December of 2017.

The third halving happened on the 11th of May, 2020. Early that Monday, the price of bitcoin rose to $9,100 from $8,500 after dropping drastically within minutes from $10,000 to $8,100 the weekend before. Later that day, it dipped to $8,900.

While bitcoin halving is a highly anticipated event with many people hoping and predicting a price increase, the halving is a time surrounded by extreme speculation, volatility and hype and no one can tell for sure how the market will immediately react to the event.

What happens when miners’ BTC rewards get halved?

The next bitcoin halving won’t happen until sometime around 2024 and this time the BTC rewards for miners would be halved to 3.125 BTC. Every 4 years, the reward for mining bitcoin would be cut in half and when this happens miners would weigh the profitability of their mining and some may stop if the price of bitcoin does not increase in response to it being scarce. If this happens, the processing power of the network might reduce but the software would automatically lower the level of difficulty in verifying transactions in order to maintain a supply

What happens when the last bitcoin has been mined?

When all 21 million bitcoins have been mined, the only way to reward miners who keep verifying transactions and keeping the network running would be through transaction fees. However, the last halving of bitcoin won’t be happening anytime soon as it is estimated to happen by 2140. In addition, the protocol might be modified before then using tools like the Bitcoin Improvement Proposal.