What is Bitcoin Halving? How does Bitcoin Halving work?
Bitcoin is the first cryptocurrency ever created and it comes with the halving mechanism. Halvings are said to positively impact the Bitcoin price and the market in general. What is Bitcoin halving? What are its implications? Let’s find out in this article.
What is Bitcoin Halving?
Bitcoin halving is an event in which Bitcoin miners’ block rewards are cut in half. Halving happens every four years and reduces the amount of Bitcoin entering the supply.
In 2009, Bitcoin was created by Satoshi Nakamoto, who saw the problems behind governments printing more money to stabilize economies. This leads to fiat currencies being devalued, which Satoshi believed could lead to disastrous effects. Therefore, Bitcoin is designed to be decentralized and trustless, with a hard cap of 21 million and strict rules on how it is released, preventing other parties from creating more Bitcoins.
On the Bitcoin blockchain, new Bitcoins are created and rewarded to miners for verifying transactions and adding them to blocks, keeping the network up and running. Therefore, the existing amount of Bitcoin goes up as new blocks are generated, approximately after every 10 minutes.
Throughout its lifespan, Bitcoin has a total of 32 halvings, each happening after every 210,000 blocks, or approximately 4 years.
How does Bitcoin Halving work?
New Bitcoins are released as miners maintain and secure the Bitcoin ledger, and get rewarded with new Bitcoin, known as block rewards.
After every 4 years, their mining reward is halved, which decreases the amount of new Bitcoin entering the supply. In 2009, the mining reward for each block was 50 Bitcoins. The reward was cut in half, down to 25 Bitcoins after the first having, then 12.5 after the second, etc.
Satoshi Nakamoto, the creator of Bitcoin, believed that scarcity could create value. Similar to gold, the supply of Bitcoin is limited, specifically to 21 million Bitcoins and is unchangeable, making this digital currency scarce. Therefore, cutting the amount of mined Bitcoin every four years could theoretically drive its price higher.
With a hard cap of 21 million and a total of 32 halvings, this process is expected to last until 2140, when the limit is reached. Miners will then be rewarded with transaction fees paid by network users to keep the network up and going.
History of Bitcoin halvings
The first Bitcoin halving in 2012
In 2009, Bitcoin was first created by Satoshi Nakamoto. The first block was mined on January 3, 2009 and the initial mining reward was 50 BTC per block back then.
On November 28, 2012, the first Bitcoin halving happened after 10,500,000 BTC (210,000 blocks of 50 BTC) had been mined, reducing the mining rewards by 50%, to 25 BTC per block. The BTC price took a massive surge, from $12 to a new ATH at $1217 on November 28, 2013.
Bitcoin halving in 2016
The second Bitcoin halving took place on July 9, 2016 when the BTC price was at $647. The mining reward was halved to 12.5 BTC per block. The event resulted in a short-term correction, followed by another major price increase, peaking at $19,700 on December 17, 2017.
Bitcoin halving in 2020
The latest halving was on May 11, 2020, cutting the reward to 6.25 BTC per block. At the time, the BTC price was around $8,787. The event, as well as previous halvings, did not incur instant price increase, but the BTC price slowly rose and peaked at $64,507 on April 14, 2021.
Pros and cons of Bitcoin Halving
Pros
When Bitcoin was first created, the high block reward drew people to the network, raising awareness and keeping it running. However, if this rate remained unchanged as Bitcoin became well-known, the whole amount of Bitcoins would have been fully mined in 2016 and belonged to a certain number of early adopters. It never would have been widely known and desired if this happened. Therefore, halving is a revolutionary solution that helps Bitcoin gain and maintain its popularity.
Unlike the traditional fiat currencies that can easily be issued by the governments, Bitcoin is designed to be a decentralized and deflationary currency, with a predictable inflation rate decreasing after every halving.
Bitcoin’s inflation rate in 2011, before the first halving, was 50%. After the 2012 halving, this rate was reduced to 12% and resulted in a sharp price increase. In 2016, this rate was recorded at around 4-5% and as of now, after the most recent halving in 2020, Bitcoin’s inflation rate is approximately 1.77%.
As the supply decreases, the value of Bitcoins that are yet to be mined increases, raising the demand and popularity. Therefore, the previous halvings can be seen followed by a bull run, raising the price despite going through large drops.
Cons
Since Bitcoin mining requires high equipment and electricity costs, the BTC price needs to rise dramatically in order to keep miners in the network, increasing the hash rate. Hash rate is the number of SHA256 computing operations completed per second, and the more miners, the higher the hash rate, the faster and more secure the network will be.
However, as halving may lead to a bull run, it doesn’t happen immediately. The beneficial result couldn’t be seen until a few months after the first halving in 2012, and nearly a year after the second halving in 2016.
If the positive impacts keep on taking longer to be noticed, miners’ profitability might not be attractive enough to miners. As a result, impatient miners may leave, leading to possibilities of 51% attacks on the Bitcoin network due to reduced speed and security.
How does Bitcoin Halving affect investors and miners?
Investors
As mentioned above, Bitcoin halvings may theoretically increase the BTC price as the supply is reduced and the demand rises, potentially leading to other cryptocurrencies’ prices to surge. This generally initiates anticipation of halvings among the community, raising trading activities on different blockchain platforms in the crypto market.
Even though the effect did not occur immediately after the previous halvings, we can still see a major difference in the BTC price since the start, from only a few cents to over $60,000. Therefore, BTC halvings may be good news for long-term investors.
Miners
Bitcoin mining is a costly process as miners need to invest in proper equipment and electricity, solving complex mathematical puzzles to keep the Bitcoin network running smoothly and securely.
Theoretically, halving causes a chain reaction involving miners’ block rewards:
However, if the price does not increase significantly, individual miners may not be able to generate enough profit to survive or compete with large mining companies.
FAQs about Bitcoin Halving
What happens to the Bitcoin price after halving?
As seen from historical data, the Bitcoin price has increased dramatically and steadily since it was first created in 2009, despite multiple drops. The effect did not happen immediately after the halvings and there are many factors contributing to the price change. However, halvings are said to play a part in making this happen.
Block rewards are halved meaning the mining costs are doubled. Therefore, miners need to adjust their selling price to the costs, positively affecting the overall Bitcoin price. Moreover, as previously mentioned, reduced supply increases the value of unmined Bitcoins, thereby positively influencing the Bitcoin price.
What if Bitcoin has no block reward?
With a total of 32 halvings in total, each happening roughly every 4 years, the total amount of Bitcoins will be fully mined around the year 2140. At this point, miners will no longer be incentivized with block rewards, but with transaction fees instead. Therefore, transaction fees on the Bitcoin network are expected to rise in the future.
Is Bitcoin halving good?
Bitcoin halvings have had positive impacts on its inflation rate and price historically. Therefore, halvings may be a good thing from investors’ point of view, especially when the market starts to heat up in anticipation of the event.
As for miners, even though the rewards are reduced every 4 years, the Bitcoin price should increase in the long run as demand rises. However, these positive impacts might happen later than expected and may not bring massive profit, and later entrants should consider the costs and profitability before mining.
Conclusion
Designed as a revolutionary decentralized asset, Bitcoin and its halving mechanism has proven to have positive impacts on the market in the long run. Investors can expect these impacts happening months before halving happens. However, the Bitcoin price is not influenced by halvings alone, but also by other factors, so investors should not make decisions based on halvings alone. It is best to stay alert and be well prepared for any circumstances.