What Is Bitcoin Halving and Why Is It Important?

Bitcoin halving is one of the most anticipated events in the history of the Bitcoin network. New bitcoin is created when miners who validate transactions and add new blocks are rewarded. This reward comes in the form of newly minted bitcoin. Halving reduces miners’ reward hence the rate at which new bitcoin enters into circulation is also halved. This event is believed to have a significant effect on the network as well as on the price of bitcoin.

Unlike fiat currencies that can be printed at will when the government decides, bitcoin is capped at 21,000,000 and cannot exceed that. Halving is a way to regulate the amount of bitcoin that comes into circulation at a time. This also helps curb inflation as more bitcoin cannot be created. In this article we will take an in-depth look at Bitcoin halving and why it is important.

The Bitcoin Network

The Bitcoin network is made up of a large number of nodes, which are computers that run the Bitcoin software and maintain a copy of the blockchain, the decentralized ledger of all Bitcoin transactions. The nodes on the network are responsible for validating the transaction by checking that the sender has enough bitcoins to send and that they are the true owner of the bitcoins. Once the transaction is validated, it is grouped with other transactions into a block and added to the blockchain.

The decentralized and trustless nature of the Bitcoin network means that users do not have to put their trust in any third parties in order to conduct transactions. Instead, the network as a whole validates transactions, making the system resistant to fraud and censorship.

Bitcoin Mining

The Bitcoin network also creates new bitcoins through a process called mining. Miners, in accordance with the Proof of Work (PoW) mechanism, use powerful computers to solve complex mathematical problems, and the first miner to solve the problem is rewarded with newly created bitcoins. When a miner solves the PoW, they broadcast the solution to the network and the other miners, or nodes, verify it. If the solution is valid, the miner who solved it is allowed to add the block to the blockchain and is rewarded with a certain number of newly created bitcoins. This reward is called the block reward.

Because mining bitcoins is a highly competitive process that consumes a lot of computational power and energy, it has evolved over time to require specialized hardware known as ASICs (Application-Specific Integrated Circuit), and many miners join mining pools to increase their chances of receiving block rewards. The mechanism is made to be less attackable the more the number of participants in the network grows, as the more people make hardware and energy available, the more difficult it becomes to solve the mathematical problems to add the block to the blockchain.

What Is Bitcoin Halving?

Bitcoin halving is an event that reduces the number of bitcoin miners receives for validating transactions on the bitcoin network. Bitcoin network uses Proof of Work (PoW) consensus mechanism to validate transactions and add new blocks. Miners who compete to validate these transactions receive block rewards. This reward is in the form of newly minted bitcoins. This brings new bitcoins into circulation.

After every 210,000 blocks have been minted which takes roughly 4 years, the miners’ rewards are halved. Hence the number of bitcoins that are released is also halved. Initially in 2009, when cryptocurrency was still new and not so popular, miners were rewarded with 50 BTC. After the first halving in 2012, the block reward was reduced to 25 BTC. In 2016, the event reduced miners’ incentives to 12.5 BTC. And the last halving that occurred in May 2020 saw the block reward down to 6.25 BTC.

The next halving is expected to take place in 2024 and each new block will only generate 3.125 BTC. The trend will continue till the 21,000,000 BTC hard cap is reached and this is estimated to be 2140. As it stands right now, about 90% of the total supply of BTC is already in circulation, with roughly 10% more remaining. Bitcoin halving is a way to ensure that the supply of BTC decreases over time which is believed will make it more valuable.

What is the Importance of Bitcoin Halving?

Bitcoin halving reduces the rate at which new bitcoins are created. Simple economics tells us that if fewer quantities of a commodity are produced, there will be scarcity which in return will make them more valuable. So in this case, higher demand and lower supply of BTC will make it more valuable. This will in return lead to an increase in the price of bitcoin though it may take some time to manifest.

After the first halving in 2012, the price of BTC rose from $12 to about $1217 within a year. Before the second halving in 2016, BTC was traded at around $647 and by late 2017, the price skyrocketed to almost $20,000. The last one in 2020 saw the price from $9,000 to $30,000 by the end of 2020. It can be seen that halving has a significant effect on the price of bitcoin even if not immediately but in the long run.

Source: Seeking Alpha

Bitcoin has been programmed to be a deflationary asset. This means that the supply decreases over time. The maximum supply of bitcoin is capped at 21,000,000 and once this is reached, new bitcoin will cease to exist. Bitcoin halving helps to regulate the rate at which new ones are released. Without halving, it will take just a few years to hit the hard cap which will lead to nothing but inflation. So halving is a technique to curb inflation and maintain scarcity which in return will make bitcoin more sought and valuable.

What Will Happen When Bitcoin Reaches the Maximum Supply?

The last Bitcoin halving is expected to take place in 2140. Miners will no longer receive block rewards in the form of newly minted bitcoin as no more of it can be created. But miners still need to be incentivized for the energy they consume in validating transactions and adding new blocks. When this happens, the remedy will be to incentivize miners from the transaction fees people pay each time they use the network. This might cause transaction fees to be more expensive in the future.

Conclusion

Bitcoin has been programmed in such a way that after every 210,000 blocks, miners’ rewards will be halved. This takes roughly four years to happen. The first halving took place in 2012 and the next is expected to be in 2024. By 2140, when eventually all the 21,000,000 BTC must have been mined, miners will no longer receive rewards in the form of new bitcoin. This reward will come in the form of transaction fees.

Bitcoin halving does have a significant impact on the price of bitcoin. This sometimes does not manifest immediately but takes months, in some cases years. For an investor, it is a good time to make a profit. Miners are faced with fewer rewards which makes it difficult for small mining firms to compete with bigger firms.