What is Bitcoin halving and how does it affect BTC's price?

This article aims to explain the concept of Bitcoin halving, its significance in the Bitcoin network, and its potential impact on the price of Bitcoin.

Bitcoin is the most successful cryptocurrency, largely due to the ingenuity of its design. A combination of economic incentives paired with advanced cryptography, an innovative consensus protocol, and a hard-coded monetary policy has enabled Bitcoin to become a new type of money that many consider superior to existing currencies.

One of the essential aspects that drives Bitcoin’s long-term price development is known as the “Bitcoin Halving,” which helps to create disinflationary pressure on the digital currency.

Table of contents

• What is Bitcoin halving?
• How does Bitcoin halving work?
• History of Bitcoin halving
• When is the next Bitcoin halving event?
• What happens when Bitcoin halves?
• Bitcoin's halving effect on the price

What is Bitcoin halving?

Bitcoin halving is an event that occurs in the Bitcoin network where the reward for successfully mining new blocks is halved at regular intervals. A halving event lowers the reward Bitcoin miners receive for validating transactions by 50%, slowing the rate at which new Bitcoins enter the market.

Halvings happen every 210,000 blocks that are mined, which happens roughly every four years and will continue until 2140 when the 32nd halving will occur. By then, Bitcoin will have hit its maximum supply, at which point miners will only be rewarded through transaction fees paid by users as an incentive for confirming transactions.

When Bitcoin launched, the mining reward for each block was 50 BTC, and over 10.5 million BTC were mined within four years. The reward has since been reduced to 6.25 BTC after three successful halvings. 

The halving is one of the most significant concepts of Bitcoin tokenomics (the economic principles and processes that regulate the behaviour and value of a cryptocurrency), as it assures a progressive flow of Bitcoin into the market while keeping the maximum supply at 21 million. As of this writing, 19.53 million BTC (93%) have been mined, leaving just 1.47 million BTC to be mined in the next 116 years.

How does Bitcoin halving work?

As the Bitcoin halving mechanism is built into the software, it happens automatically and does not rely on a third party or central authority. When transactions occur in the Bitcoin network, they are stacked into groups called blocks, and miners receive rewards for successfully validating transactions in a block. For every 210,000 blocks that are mined, the Bitcoin protocol automatically reduces the reward that miners earn to half.

There have been three Bitcoin halvings to date. The first took place in 2012 when 210,000 blocks were mined, dividing block rewards from 50 BTC to 25 BTC. The second came in 2016, when the 420,000th block was mined, resulting in a 12.5 BTC reward. In May 2020, there was a third halving that further decreased mining rewards to 6.25 BTC. The last halving will take place in 2140, at which point the reward system will switch to transaction fees only.

Bitcoin mining explained

Bitcoin operates in a decentralised environment, which means there is no central authority to process transactions and ensure user honesty. To address this issue, Bitcoin uses a process called crypto mining to validate transactions.

A proof-of-work (PoW) consensus mechanism is used where nodes in the network (called miners) solve complex mathematical problems to be rewarded with new units of Bitcoin. 

After a transaction is confirmed and verified by miners, it is added to a block that becomes part of the Bitcoin blockchain and cannot be removed. A block reward is given to the miner in exchange for their time and effort provided the block is accepted by at least 51% of the network's nodes. New Bitcoins are introduced into circulation through this procedure. Bitcoin miners currently receive 6.25 BTC as block rewards in addition to transaction fees. 

When Bitcoin was initially created, anyone could participate in mining through a personal computer, but over time, the network has expanded and mining difficulty has increased, leading to the use of powerful hardware like GPUs and ASICs. Some miners pool their computing power together to enable them to earn rewards faster.

History of Bitcoin halving

There have been three halvings since Bitcoin was created in 2009:

The first Bitcoin halving in 2012

At the time of the first Bitcoin halving, there were concerns about how Satoshi's economics would impact the expansion of Bitcoin: would they curb inflation or spell the end for the cryptocurrency? Some argued that the finite supply and halving events could lead to deflation and a decrease in the value of Bitcoin, while others believe it could promote scarcity and drive up the price.

Following the November 28, 2012, halving, which reduced the Bitcoin block reward from 50 to 25 BTC, the price of one BTC shot up from $12 to $1,032 (more than 8,500%) in less than a year. This significant increase in value was driven by a combination of factors, including increased demand from investors and speculators, growing acceptance of Bitcoin as a legitimate form of currency, and the perception of scarcity due to the halving event. Additionally, the reduced block reward meant that fewer Bitcoins were being created, which further contributed to the increase in value. 210,000 blocks had been mined by this point, and half of the 10.5 million Bitcoins in circulation had been released.

The second Bitcoin halving in 2016

The cryptocurrency community eagerly anticipated the date of this second halving. In addition, Bitcoin was gaining acceptance and popularity among investors, resulting in a short-term price increase before the July 9 halving date.

When the 420,000th block was mined, the Bitcoin block reward was cut in half again, to 12.5 BTC. Bitcoin was trading at $651 at the time. Bitcoin experienced a free fall just a few weeks after the halving. However, this was merely a pause before an exponential rise, as the price of one bitcoin reached an all-time high of $20,089, 526 days after the halving. 

The third Bitcoin halving in 2020

The third halving occurred amid several uncertainties, particularly the impact of the COVID-19 crisis, which caused the price of Bitcoin to crash in March. However, Satoshi's economics have proven to be remarkable, as Bitcoin has been on an upward trend.

On May 11, the block reward was cut in half, from 12.5 to 6.25 at the 630,000th block. At the time, Bitcoin was trading for around $8,787/BTC. Bitcoin reached a high of around $66,000 18 months later.

The next halving is expected to occur near April 13, 2024, at block 840,000, where block rewards will be cut in half to 3.125 BTC.

When is the next Bitcoin halving event?

The fourth Bitcoin halving is expected to take place in the middle of April 2024. As halvings occur every 210,000 blocks, the 2024 halving will take place on block 840,000, at which point the block reward for miners will be reduced by 50%, from 6.25 BTC to 3.125 BTC.

What happens when Bitcoin halves?

The primary and most noticeable change that occurs during a Bitcoin halving is a reduction in the mining reward. Bitcoin miners' rewards for successfully mining a new block are cut in half. The number of newly created bitcoins that enter circulation is reduced by halving.

As the block reward is reduced by 50%, the rate at which new bitcoins are generated decreases. This reduced supply growth results in lower inflation for the cryptocurrency.

As halvings continue, the network gradually approaches this maximum supply. When the maximum supply is reached, miners will no longer receive block rewards in the form of newly minted Bitcoins, and transaction fees will be the primary source of miner incentives.

In the past, Bitcoin price halvings have resulted in a price increase in the months that followed. Although miners receive fewer bitcoins for their efforts, the subsequent price increase has helped cover any potential losses. However, because the rewards are still decreasing, halving may not result in a significant price increase, forcing some miners to leave the network. 

Bitcoin halving rewards

What happens after the last Bitcoin halving?

Bitcoin halvings will cease when Bitcoin reaches its maximum supply of 21 million BTC. At this point, miners will no longer receive block rewards in the form of newly minted Bitcoin. 

Instead, miners will be incentivised to continue validating transactions through the reward of transaction fees paid by users. Given how big the Bitcoin network is poised to be at that point, on-chain transaction fees will be high, rewarding miners for continuing to support the network.

Bitcoin's halving effect on the price

Bitcoin halving events have historically been associated with price increases. This is because the reduced rate of new Bitcoin creation can cause scarcity, potentially driving up demand and, as a result, the price. However, it is important to remember that market dynamics are influenced by a variety of factors, and price movements can be complicated.

A look at the past three halving events shows that a significant price rise usually begins after six to twelve months. Also, before a halving event, the price of Bitcoin tends to rise as investors anticipate a price rally post-halving. 

However, whether a price rise will occur during the next halving is not certain, as the circumstances surrounding these events are not the same.

Is Bitcoin halving good or bad?

Halving is one of the core economics attracting investors to Bitcoin. This is because, unlike fiat currencies that are bound to be inflationary due to their ever-increasing supply, Bitcoin is capped at a maximum supply, and halvings reduce its inflation rate.

The Bitcoin halving is considered a good economic model as it creates disinflationary pressure on the digital currency, helping it to increase in value over time (provided demand for Bitcoin continues to grow). 

However, Bitcoin has been subject to several criticisms because its design of halving and supply limit encourages users to hold (or even hoard) their tokens without spending in the hopes of a significant price increase. This culture, also known as HODLing, is why some consider Bitcoin an investment and not a transactional currency.

In conclusion, whether Bitcoin's halving is seen as positive or negative depends on individual perspectives and the broader economic and market context. It is a fundamental part of Bitcoin's design and monetary policy, and its implications can vary for different stakeholders, including miners, investors, and users. Some view it as a strength that sets Bitcoin apart, while others may see potential drawbacks.

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