What is Bitcoin Halving?

    Simar Marwaha
    Simar Marwaha
    Published on December 20, 2022 6:29 PM

    Updated on January 16, 2023 11:10 AM

    When the reward for mining Bitcoin transactions is cut in half, this is known as a Bitcoin halving event. Let's study the idea in detail.
    What is Bitcoin Halving?
    Source: Medium

    Bitcoin is a limited resource despite having a hazy appearance. 21 million Bitcoin will ever exist. Only 2 million Bitcoins remain after 19 million have previously been mined. A Bitcoin halves happens every four years to stop the cryptocurrency from losing value over time. 

    Supporters of the most widely used cryptocurrency in the world view Bitcoin as a store of value that is more analogous to gold than a fiat currency because of its transparent and automated supply management. With each new block, the Bitcoin system automatically halves the quantity of new coins that are created.

    The reward for mining bitcoins is reduced by half during the Bitcoin halving. It happens every four years to divide in half. In order to combat inflation by maintaining scarcity, the halving policy was incorporated into the Bitcoin mining algorithm. Theoretically, if demand stays the same despite the slower rate of Bitcoin supply, the price will rise.

    According to David Weisberger, CEO of trading site CoinRoutes, Bitcoin now has an inflation rate of less than 2%, which will drop with additional halvings. Comparing it to the June consumer price index's annualised inflation rate of 9.1%, things are looking very good.

    The block reward provided to Bitcoin miners for processing transactions is halved every 210,000 blocks mined, or about every four years. The pace at which new bitcoins are issued into circulation is cut in half during this occurrence, which is why it is known as a "halving." This is how Bitcoin enforces artificial price inflation until every bitcoin is distributed.

    Also read: How Bitcoin and Inflation are related?

    How Does Bitcoin Halving Work?

    All Bitcoin transactions are verified by a decentralised network of validators through a process known as mining. When they are the first to utilise intricate math to add a collection of transactions to the Bitcoin blockchain as part of its proof-of-work method, they are rewarded with 6.25 BTC.

    6.25 BTC is now worth around $148,000, which provides miners with a respectable incentive to continue contributing blocks that keep Bitcoin transactions flowing smoothly.

    These blocks of transactions are added typically every 10 minutes, and the Bitcoin code mandates that when 210,000 blocks are generated, the incentive for miners is cut in half. That occurs approximately every four years, usually during times of increased volatility in the price of bitcoin.

    When Was the First Bitcoin Halving?

    In November 2012, the first Bitcoin halving took place. The most recent halving took place in May 2020, while the subsequent one happened in July 2016. When Bitcoin was launched in 2009, the incentive, or subsidy, for mining initially began off at 50 BTC each block. Every time there is a fresh halving, the quantity is reduced by half. For instance, the incentive for mining Bitcoin decreased to 25 BTC each block during the first halving.

    In 2140, the last halving will take place. There will be 21 million Bitcoin in circulation at that time, and no new coins will be produced. Miners will then only get transaction fees going forward. 

    The CEO of miner and blockchain services provider TAAL Distributed Information Technologies, Richard Baker, notes that once the subsequent halving occurs, miners might shift their transaction processing power away from BTC as they look for higher transaction fees elsewhere to make up for lost Bitcoin revenue. Less mining activity would result in a less secure network, warn experts.

    However, Patricia Trompeter, CEO of cryptocurrency miner Sphere 3D Corp., points out that while the halving decreases the payout for miners, it does so without lowering the demand.

    In reaction to the supply shock, she claims, "Bitcoin prices should surge considerably if the economic theory holds true, which historically for Bitcoin it has." However, whether the historical price change around each halved was a direct result of the halving is still up for question. Increased pricing would encourage miners to continue processing Bitcoin transactions.

    When Will Bitcoin Halve Again?

    According to the Bitcoin algorithm, halving must occur once a specific number of blocks are generated. Although no one can predict with certainty when the next halving will take place, analysts predict that it will happen in May 2024. The interval since the previous one would be almost precisely four years.

    In order to prevent a significant shock to the network, experts argue that Bitcoin halvings are reasonably predictable. However, it doesn't follow that there won't be a trading frenzy surrounding the subsequent halves of Bitcoin.

    Effects of the Bitcoin halving occurrence

    A smaller payout for mining Bitcoin would lower the amount of money that miners may make by adding new transactions to the blockchain, which is one of the halving's more general effects. The amount of fresh Bitcoin that enters the market is determined by miner payouts. Therefore, cutting these payments in half lessens the flow of new Bitcoin. Economics of supply and demand are applied in this situation. Demand shifts (increases or lowers) when supply declines, which affects pricing.

    The event of the halving has also decreased the pace of inflation for bitcoin. The loss of anything's purchase power—in this example, the currency—is known as inflation. However, the fundamental structure of Bitcoin is intended to be a deflationary asset. Halving is essential for doing this.

    Bitcoin's inflation rate was 50% in 2011, but it fell to 12% in 2012 and 4-5% in 2016 following halving in 2012. Its current inflation rate is 1.77%. This implies that the value of Bitcoin rises following each halving. Every time there has been a halving, Bitcoin has typically seen a bull run. Demand increases as supply declines, driving up the price. But this increasing trend won't start right away.

    The price of BTC would have to drastically increase for miners to obtain half as many coins due to the high cost of electricity necessary to power the computers that solve the mathematical riddles. If the price does not increase concurrently with the fall in reward, miners will struggle to remain profitable and competitive.

    A new technique that can produce more hashes per second while using less energy and having fewer overheads will be required since miners will need to be as efficient as possible.

    Several nations have shown interest in the currency, and their economies may have an impact on the price of Bitcoin. More significantly, because of the more publicity it is presently receiving, the price of Bitcoin is probably going to grow. As more shops, small enterprises, and even important organisations join Bitcoin and the blockchain, the number of transactions will only rise.

    The Verdict

    Bitcoin halving reduces the pace at which new bitcoins are put into circulation by half and imposes artificial price inflation on the network of the cryptocurrency. The planned 21 million limit for bitcoin is anticipated to be achieved around the year 2140, at which point the rewards system is anticipated to end. After then, fees will be paid to miners for handling transactions.

    Each block in the chain that was mined in 2009 earned a reward of 50 bitcoins. After the initial halving, there were 25, then 12, then, as of May 11, 2020, there were 6.25 bitcoins every block. Significant repercussions for the network follow Bitcoin's halving.

    Investors can anticipate a price increase in the days preceding the halving and following it. The halving event may lead to a consolidation of the ranks of miners as lone miners and tiny enterprises leave the mining environment or are absorbed by more powerful actors.

    Bitcoin Halving FAQs

    When in 2024 is the next Bitcoin halving?

    The reward will be reduced to 3.125 bitcoins at the time of the subsequent Bitcoin halving in March 2024. All of this is algorithmically regulated, ensuring that Bitcoin miners worldwide are aware of the precise day and time of the halving event.

    What date is the Bitcoin halving?

    The next Bitcoin halving is slated for block 840,000 in 2024. The Bitcoin block reward will decrease from 6.25 Bitcoin to 3.125 Bitcoin on April 29, 2024 at 11:22:05 PM UTC.

    What happens when BTC halves?

    The reward for mining bitcoins is reduced by half during a bitcoin halving. At the current pace of production, halvings take place every four years or so. The halving of bitcoins is a component of a mechanism that aims to keep the overall supply at 21 million.

    How many times has Bitcoin halved?

    The last three Bitcoin halves occurred in 2012, 2016, and 2020, according to the history of halving dates. In 2012, when the reward for mining a block was decreased from 50 to 25 BTC, the first Bitcoin halving or split took place.

    Should I buy Bitcoin before halving?

    The cost of bitcoin was rising even before the halving. Therefore, it would be a good moment to buy in Bitcoin before the next halving occurrence.

    How long is next halving?

    Since block height determines the upcoming Bitcoin halving dates, this is impossible to anticipate. However, because halving occurs every 210,000 blocks, it is anticipated that the next halve will take place on block 840,000 in 2024.