Bitcoin Halving: Why They Happen and Why You Should Care
Learn why Bitcoin Halving matters. Understand its history, impact on supply, and potential effects on the crypto market. An essential guide for bitcoin enthusiasts.
Bitcoin is the pioneering cryptocurrency that has birthed the entire crypto ecosystem. As the world’s leading decentralized digital currency, Bitcoin provides an alternative monetary system built for the digital age.
Arguably, Bitcoin’s most significant feature is its hard-coded monetary policy that comes with a clear issuance model guided by regular block reward halvings, called Bitcoin halvings.
The Bitcoin Halving is a periodic event on the Bitcoin network that reduces the rate of new bitcoin mined. This event is vital to how the network works and is an important concept to understand if you are interested in owning, earning, or trading bitcoin.
In this article, we will learn more about Bitcoin Halving, including how it works, its history, and possible effects on the network and the price of Bitcoin. Remember, you can also buy, sell, store, swap, and even earn bitcoin using Trust Wallet.
Note: While this article looks at the concept of Bitcoin and the Halving, it is in no way to be taken as financial advice and is purely for informational and educational purposes. Further, previous events during halvings, including price increases, don’t guarantee future events. Always Do Your Own Research (DYOR) before interacting with any digital currency, including bitcoin.
What is Bitcoin and How Does It Work?
Bitcoin is a decentralized digital currency created by a pseudonymous person or group of people known as Satoshi Nakamoto. The world’s first cryptocurrency was launched on the 3rd of January 2009, when its first block was mined and contained the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” This text implied that Bitcoin was being created to help reduce the flaws of the current financial system.
Satoshi Nakamoto had also previously sent a white paper to the cryptography mailing list in October 2008, detailing how the blockchain and token would work, including his vision for the network.
In the paper, he stated that Bitcoin was a “purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” For this to be possible, Bitcoin was created as a decentralized blockchain network.
Blockchain networks are distributed databases that allow for the recording and sharing of data between people or groups. This data is then recorded on a ledger where people can view past transactions on the network. The data created on a blockchain is stored in blocks, which are like virtual storage units of a specific size, and are then interlinked through cryptography to form a chain, giving them the name ‘Blockchains.’ There are different types of blockchains, including private, public, hybrid, and consortium blockchains.
The Bitcoin blockchain is an open public blockchain, meaning that all the transactions and exchange of data on the network are recorded on a public ledger, which is accessible to all. Transactions are recorded on blocks on the Bitcoin blockchain, which currently has a limit size of 4 MB per block, after which a new block is created.
Block creation on the Bitcoin network involves key players known as miners. Their role is to confirm each transaction so it can be added to the blocks and then recorded on the blockchain’s public ledger.
After creating a new block, the network automatically generates bitcoin for the miner as an incentive for validating transactions on the network. This is known as the block reward.
The History of Bitcoin Halving
After every 210,000 blocks are mined, which has been approximated to be around four years, the block reward in the Bitcoin blockchain automatically reduces by half in an event known as the “Bitcoin halving” or “halvening.”
This cycle was embedded in the code written by Satoshi and has automatically occurred after every 210,000th block has been mined since 2009.
The halving reduces the amount of bitcoin miners receive as a reward after adding a new block to the Bitcoin blockchain.
When the first block was mined in 2009, each miner received a reward of 50 bitcoin (BTC). On Nov 28, 2012, the first halving saw the reward be reduced to 25 bitcoins, then 12.5 bitcoins on July 9, 2016, and most recently, 6.25 bitcoins on May 11, 2020.
While the block rewards have reduced to 6.25 BTC, the price of bitcoin has historically been affected by each halving. In the past, the price of bitcoin has increased and faced upward volatility after each halving as follows.
In 2012, the price of bitcoin before the halving was around $12, then increased to around $1,030 at the end of the year.
During the next halving in 2016, bitcoin was at about $650 before the halving. BTC’s price dropped for a few weeks after the halving, then surprisingly blew up to $20,089 a year and a half later.
Then, in 2020, the third halving happened when the price of BTC was at around $8,700 at the time and, in a year and a half, had gone up to around $67,000.
While these price changes indicate a positive effect on the price of BTC following a halving, it is not certain that the same trend will occur after the next halving.
Why Does Bitcoin Halving Happen?
The Bitcoin halving was created as part of the digital currency’s ingenious monetary policy. It affects three main factors: scarcity and control supply, inflation control and market forces, and economic implications, all of which we explore briefly below.
Scarcity and Controlled Supply
The price of bitcoin is determined by the law of demand and supply, a common economic theory stating that if the supply of a good or service is higher than its demand, its prices will fall. Conversely, if the supply of goods and services exceeds the demand, its price will increase.
For bitcoin, this principle was integrated into the network as one of its key modes of operation. Other than the limited supply of bitcoin capped at 21 million coins, the halving contributes to controlling the supply by ensuring that the amount of bitcoin available reduces over time, thus potentially increasing its price.
This helps to ensure that bitcoin remains scarce and has a controlled supply over time.
When Satoshi mined the first bitcoin with the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks," it was assumed that they were responding to the high inflation rates seen worldwide in preceding years.
Inflation has always been largely pinned on how governments adjust the supply of money in their economies to meet demand and other economic factors. However, sometimes, governments can adjust inflation rates according to their interests, resulting in their citizens suffering due to high inflation caused by excessive money printing.
Bitcoin was created to provide an alternative to government-issued money, handing financial sovereignty back to the people.
Currently, Bitcoin has an inflation rate of around 1.74%, and that rate decreases over time, making BTC a disinflationary currency that will eventually, most likely, become deflationary. With each halving, fewer new bitcoin enter the system, reducing the rate of supply, which creates bitcoin’s disinflationary monetary policy.
This has helped to position bitcoin as an inflation-resistant currency.
Market Forces and Economic Implications
History shows that the halving impacts the crypto market at large, especially since bitcoin is the most dominant digital currency. This leads to a shift in market forces as many people anticipate what will occur once the halving happens.
For one, it is expected many people owning bitcoin will hold onto their coins, hoping that its price will increase after the halving, thus reducing circulating supply.
On the other hand, the halving also has an economic impact on bitcoin miners, as they need to change the version of their ASICs, increase power consumption, and find more affordable energy sources to ensure they remain profitable.
The Technicals Behind Bitcoin Halving
The Bitcoin halving is enforced by the Bitcoin protocol’s code as an automatic event that happens after miners have created 210,000 blocks.
For a Bitcoin miner to create a block and receive bitcoin as a reward, they have to use computers fitted with Application-Specific Integrated Circuits (ASICs), which help ordinary computers process complex numbers (Hashes) that the Bitcoin network generates.
Once a miner’s computer generates a number similar to the one created by the Bitcoin network, they theoretically “crack a code,” and the network releases a specific number of coins to their wallet, also known as a block reward. The total computational power collectively used by miners to process transactions on the Bitcoin blockchain and “crack the codes” is known as the Bitcoin hashrate.
The Bitcoin hashrate can change with time, increasing the mining difficulty and consequently helping to maintain the network’s security. The hashrate is determined by the number of miners on the network at a time. Since each miner’s computer is simultaneously working to match the required hash represented as a complex equation, the more computers try to solve the equation, the more complex the equation generated becomes. This adjustment is also written into the network’s code and occurs automatically.
Once all bitcoin are mined, which is approximated to occur in the year 2140, miners will no longer be receiving bitcoin as rewards. Instead, they are expected to receive rewards from transactional fees they charge for processing transactions on the network. By this time, the price of bitcoin is expected to have risen significantly enough due to the law of supply and demand to sustain the miners and the network.
The Upcoming 2024 Halving
The 2024 halving is projected to occur when the 840,000th block is mined between February and June, with many people pointing to April 2024 as the most probable month. The exact date is yet to be confirmed and is more of a wait-to-see event.
While the date is not set in stone, the change in mining reward is. After the halving, miners will receive 3.25 BTC as a block reward, compared to the current reward of 6.5 BTC.
The halving will potentially affect the network and, especially, the miners in several ways,
Miners will need to upgrade their ASICs to newer models, which are faster and able to solve the new, more complex hashes. This shows that more financial investment will be required as the newer ASICs are expected to be more expensive.
Some miners will be pushed out of the Bitcoin mining business as the input becomes too costly to manage.
More miners may eventually have to join mining pools that enable them to band their resources and mine as a group, as it may be a more financially efficient way to approach mining.
The Bitcoin halving is one of the most significant events of the Bitcoin network, with Bitcoin enthusiasts, investors, and companies looking forward to the next halving in 2024. Not only will the halving reduce the block rewards on the network, but it will also show how the Bitcoin network was coded to operate with an entirely novel and transparent monetary policy.
As a user or potential user of bitcoin, this event is one that you should keep an eye on as it could significantly affect the price of bitcoin in the 12 to 18 months to follow (if history is anything to go by).
If you are interested in bitcoin or would like to transfer your current holdings to a safe, non-custodial wallet where you are in charge of your assets, consider downloading Trust Wallet. Trust Wallet helps you buy, sell, and store BTC safely.
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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.