Bitcoin Halving

Bitcoin halving means that the reward for miners who successfully mine a new block is periodically halved. During the halving event, the rewards that Bitcoin miners receive for confirming Bitcoin transactions are reduced by 50%, thereby reducing the rate at which new Bitcoins enter circulation.

Halvings occur after every 210,000 blocks are mined (approximately four years) and will continue until 2140, when the 32nd halving will occur. At the same time, Bitcoin will reach its maximum supply, and miners will be rewarded with transaction fees paid by users as an incentive to continue confirming transactions.

When Bitcoin was first launched, the mining reward per block was 50 BTC, and within four years more than 10.5 million BTC were mined. After three successful halvings, the reward has dropped to 6.25 BTC. The Bitcoin halving is one of the most important token economics behind Bitcoin, as it ensures that Bitcoin gradually enters the market in installments while keeping the maximum supply at 21 million.

How Does Bitcoin Halving Work?

The Bitcoin halving mechanism is written in coded form within the Bitcoin software. The halving does not rely on any third party or central authority as the entire process happens automatically. When transactions occur in the Bitcoin network, they are stacked into groups called blocks, and miners are rewarded for successfully validating transactions in blocks. The Bitcoin protocol automatically halves the rewards miners receive every time a total of 210,000 blocks are mined.

Bitcoin has halved three times so far, the first in 2012 when 210,000 blocks were mined, reducing the block reward from 50 BTC to 25 BTC. The second time was in 2016 when block 420,000 was mined, reducing the reward to 12.5 BTC. The most recent third halving occurred in May 2020, further reducing mining rewards to 6.25 BTC. The final halving will occur in 2140 and the reward system will switch to transaction fees only.

Why Bitcoin Halving?

The Bitcoin mining algorithm is programmed to find new blocks every ten minutes. As more miners join the network and add more hashing power, the time required to find blocks will decrease. In order to restore the original duration, the mining difficulty is reset every two weeks or so. As the Bitcoin network has grown dramatically over the past decade, the average time to locate a block has remained under 10 minutes (roughly 9.5 minutes).

Bitcoin’s maximum supply is limited to 21 million units. Once the total reaches 21 million, the generation of new Bitcoins will stop. So the Bitcoin halving ensures that the number of Bitcoins that can be mined per block decreases over time, making Bitcoin even rarer to guarantee its value.

Logically, every time a halving is completed, there is less incentive to mine Bitcoin. On the other hand, the Bitcoin halving is associated with a significant increase in the price of Bitcoin, which gives miners an incentive to mine more Bitcoins. As the price of Bitcoin increases, Bitcoin miners are encouraged to continue mining. On the other hand, if the price of digital currencies does not increase and block rewards decrease, miners may lose the incentive to create more Bitcoins. This is because mining Bitcoin is a time-consuming and expensive operation that requires a lot of computer power and electricity.

Influence of the Bitcoin Halving Event

The biggest impact of the Bitcoin halving is that the lower rewards for mining Bitcoin will reduce the amount of money miners can potentially make by adding new transactions to the blockchain. Miner rewards determine the amount of new Bitcoins in circulation. Therefore, halving these payments would reduce the influx of new Bitcoins. This is where supply and demand economics comes into play. When supply falls, demand fluctuates (increases or decreases), and prices change as a result.

Bitcoin’s inflation rate has also decreased due to the halving event. Inflation is the loss of purchasing power of everything, in this case money. However, Bitcoin’s infrastructure is designed to be a deflationary asset. To achieve this goal, halving plays a crucial role.

Bitcoin’s inflation rate was 50% in 2011, but after the 2012 halving, it plummeted to 12% in 2012 and 4-5% in 2016. The current inflation rate is 1.77%. This means that after every halving, the value of Bitcoin increases. Historically, every halving event has resulted in a Bitcoin bull run. As supply decreases, prices increase, causing demand to rise. However, this upward trend is slow and gradual.

Because of the high cost of electricity to power the computers that solve mathematical puzzles, the price of Bitcoin would have to rise significantly before miners could get their hands on half of the coins. If prices don't rise as rewards fall, miners will find it difficult to remain competitive and in business. And miners need to be as efficient as possible, so a new technology that can generate more hashes per second while consuming less energy and reducing overhead is needed.

Additionally, there is evidence that several countries are interested in the currency, and their economies could affect the price of Bitcoin. What's more, the price of Bitcoin is likely to rise due to the increased popularity it is now receiving. As more shops, small businesses, and even important institutions get involved with Bitcoin and blockchain, the volume of transactions will only increase.