WHAT IS BITCOIN HALVING ?

What is bitcoin halving? Definition of how it works, why it matters

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Bitcoin halving

Investopedia / NoNo Flores

What is bitcoin halving?

Bitcoin Halving is when the Bitcoin mining reward is split in half. It takes about four years for the blockchain network to open another 210,000 blocks, a standard set by the creators of the blockchain to continually slow down the rate at which cryptocurrency is deployed.

The first reward was 50 bitcoins. Previous halving dates were:

November 28, 2012 to 25 Bitcoins

July 9, 2016 to 12.5 bitcoins

May 11, 2020 to 6.25 Bitcoins

Another halving is expected to occur in April 2024, when the block reward will drop to 3.125 BTC.

As of March 2024, there were about 19.65 million Bitcoins in circulation, so only about 1.35 million were released through mining rewards.

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KEY SHOTS of Bitcoin Halving

A bitcoin halving event occurs when the reward for mining bitcoin transactions is halved.

Halvings reduce the rate at which new coins are created, thereby reducing the amount of new supply available.

Bitcoin last halved on May 11, 2020, resulting in a block reward of 6.25 BTC.

The final halving is expected to occur in 2140, when the number of bitcoins in circulation reaches a theoretical maximum supply of 21 million.

Basics of the Bitcoin Network and Bitcoin Halving

To understand the Bitcoin halving, you must first know how the Bitcoin network works.

Bitcoin’s underlying technology, the blockchain, consists of a network of computers (called nodes) that run the Bitcoin software and contain a partial or complete history of transactions that occur on its network. Each full node contains the entire history of Bitcoin transactions and is responsible for approving or rejecting a transaction on the Bitcoin network. To do this, the node performs a check to ensure that the transaction is valid. These include ensuring that the transaction contains the correct validation parameters and does not exceed the required length.

Each transaction is approved individually. This is said to happen only after all the transactions contained in the block have been approved. Once approved, the transaction is attached to the existing blockchain and broadcast to other nodes.

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Adding more computers (or nodes) to a blockchain increases its stability and security. An estimated 18,830 nodes are running Bitcoin code on March 5, 2024.

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Although anyone can participate in the Bitcoin network as a node, as long as they have enough storage space to download the entire blockchain and its transaction history, not everyone is a miner.

Bitcoin Mining Basics

Bitcoin mining is a process in which people use computers or mining hardware to participate in the Bitcoin blockchain network as transaction processors and validators. Miners receive rewards and transaction fees.

Bitcoin uses a system called proof-of-work (PoW) to verify information about transactions. It’s called proof-of-work because it takes time and energy to solve a cryptographic puzzle, which acts as proof that the work has been done.

The term mining is not used literally, but as a reference to the method of extracting precious metals. When a block is filled with transactions, it is closed and sent to the mining queue. Once queued for validation, a Bitcoin miner competes to be the first to find a number with a value less than a target set by the network. A hash is a hexadecimal number that contains all the encrypted information of previous blocks.

Mining validates transactions in a block and opens a new one. Nodes then further verify transactions in a series of confirmations. This process creates a chain of blocks containing the information that make up the blockchain.

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Transaction verification and immutability are the primary intent of the blockchain network and consensus mechanism. The Bitcoin reward is a by-product of the mining process that acts as an incentive to participate in the security of the blockchain.

Bitcoin half effects in term of Bitcoin Halving

Inflation

One of the key concepts behind bitcoin halving the reward is to address concerns about inflation. Inflation is a decrease in the amount of goods that can be bought in a certain amount of currency at a given time. In the US, inflation is measured by how much it costs to buy a basket of goods. There is an acceptable level of inflation that is considered good for the economy – usually 2%, but this number is generally a target set by central banks as a target rather than an achievable number.

The bitcoin halving is intended to counter any inflationary effects on bitcoin by reducing the reward amount and maintaining scarcity. However, this inflation “protection” mechanism does not protect Bitcoin users from the inflationary effects of the fiat currency it must be converted to in order to be used in the economy.

Market value gains can offer investors protection against inflation, but not for the cryptocurrency’s intended use as a payment method.

Inquiry

Since the halving reduces the number of newly introduced bitcoins, the demand for new bitcoins generally increases. This can be seen if you look at the price of Bitcoin after each previous halving – it generally went up.

Investing

Bitcoin was not intended as an investment. It was introduced as a payment method that attempted to remove the need to involve regulators or third parties in transactions.

It became popular with investors once it was realized that there was potential for profit. Investors have flocked to the new asset space, creating demand that the cryptocurrency’s designers may not have anticipated. For investors, the halving represents a reduction in the supply of new coins, but also offers the promise of an increase in the value of the investment if the effects of the event remain the same. But this puts bitcoin investments in the realm of speculation, as those who have invested in the cryptocurrency hope to make a profit.

Mining

Miners are people, groups or businesses that focus on mining for its profitability. When new bitcoins are awarded, the miners who receive the reward have made significant profits in the past. As the price of Bitcoin has fluctuated over the years, it has remained a lucrative endeavor – if it hadn’t been, large mining enterprises would not have continued to operate.

However, halving reduces mining rewards, so if prices stay the same or fall, the effort becomes less profitable with each halving. The large-scale mining facilities required to remain competitive require enormous amounts of money and energy. Equipment and facilities need maintenance and people to carry them out. They also need to improve their mining capacity to maintain their position in the industry.

For example, Marathon Digital Holdings, one of the world’s largest mining firms, increased its Bitcoin holdings to 16,930 and its fleet of Bitcoin miners to 231,000 in February 2024. This brought the company’s hash rate to 28.7 trillion hashes per second (5% of the total hash rate networks as of March 5, 2024).

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The increase in production capacity and holdings was likely due to the anticipation of another halving and the amount of hashing power needed to remain competitive while having the liquidity needed to fund its operations.

For smaller miners, a reduction in reward means less chance. Miners who are part of a mining pool are likely to experience smaller rewards even if prices increase – the reward is halved, but the price of Bitcoin is unlikely to double to maintain current profitability unless there is a drastic market event.

Consumers

Consumers and retail Bitcoin users may be affected by the halving of the value of the Bitcoins they hold. Those buying Bitcoin for purchases will generally only be affected by price fluctuations, which may or may not remain similar to pre-halving levels.

For those using Bitcoin for transfers, the halving means the same as it does for shoppers. The value of their transfers will depend on the market price of Bitcoin after the halving event.

What will happen when bitcoin is halved?

The term “halving” in relation to Bitcoin refers to how many tokens are awarded. It works as a way to simulate diminishing returns, theoretically intended to increase demand.

Why do bitcoin halvings occur less than every 4 years?

The Bitcoin mining algorithm is set to find new blocks every 10 minutes.

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 Some blocks last longer than 10 minutes; some take less. This can shorten or lengthen the time it takes to reach the next halfway goal. For example, if blocks are mined consecutively for an average of 9.66 minutes, it would take about 1,409 days to mine the required 210,000 blocks (four years is 1,461 days, including one leap year day).

What happens when there are no more bitcoins left?

It is often thought that the last Bitcoin will be mined in 2140. However, if the reward is halved every 210,000 blocks, it will continue to decrease until the reward is one satoshi and the total amount in circulation equals 21 million. One satoshi is 0.00000001 bitcoin – it is the lowest denomination of bitcoin and cannot be halved.

Bottom Line

Halving a bitcoin halves the rate at which new bitcoins are released into circulation. The reward system is expected to continue until 2140, when the proposed cap of 21 million bitcoins will theoretically be reached.

In 2009, the reward for each block in the chain mined was 50 bitcoins. After the first halving, it was 25, and then 12.5, and then it became 6.25 bitcoins per block as of May 11, 2020. It’s expected to halve again in April 2024.