What is Bitcoin Halving and how does it work? Everything you need to know

What is Bitcoin Halving?

The Bitcoin Halving refers to the event where the reward for Bitcoin mining is reduced by half. It occurs approximately every four years, corresponding to the creation of 210,000 additional blocks in the blockchain network. This process was established by the creators of the blockchain to systematically decrease the rate at which new Bitcoins are introduced into circulation.

Initially, the mining reward was set at 50 bitcoins. Subsequent halving events occurred on the following dates:

• November 28, 2012, reducing the reward to 25 bitcoins
• July 9, 2016, reducing it further to 12.5 bitcoins
• May 11, 2020, decreasing it to 6.25 bitcoins

The upcoming halving is anticipated to take place in April 2024, resulting in a block reward of 3.125 BTC.

As of March 2024, the circulating supply of bitcoins stood at approximately 19.65 million, leaving around 1.35 million bitcoins yet to be released through mining rewards.

Fundamentals of the Bitcoin network

Before delving into the concept of a Bitcoin halving, it's essential to grasp the mechanics of the Bitcoin network.

The foundation of Bitcoin is its underlying technology called blockchain, which comprises a network of computers known as nodes. These nodes operate Bitcoin's software and store either a partial or complete record of all transactions conducted on the network. Full nodes retain the entire transaction history of Bitcoin and play a crucial role in validating transactions within the network. They assess transaction validity by verifying various parameters, such as correct validation criteria and adherence to required length limits.

Every transaction undergoes individual approval, a process that occurs once all transactions within a block receive authorization. Upon approval, the transaction is appended to the existing blockchain and disseminated to other nodes.

Enhancing the number of computers, or nodes, within the blockchain bolsters its stability and security. As of March 5, 2024, an estimated 18,830 nodes were running Bitcoin's code.

While anyone with sufficient storage capacity to download the entire blockchain and transaction history can partake in Bitcoin's network as a node, not all of these nodes function as miners.

Fundamentals of Bitcoin mining

Bitcoin mining involves individuals utilizing computers or specialized mining hardware to partake in Bitcoin's blockchain network as transaction processors and validators, earning rewards and transaction fees in return.

The process operates on a system known as proof-of-work (PoW), where solving a cryptographic puzzle requires both time and energy, serving as evidence of the work performed.

The term "mining" is metaphorical, drawing a parallel to the extraction of precious metals. When a block is filled with transactions, it enters a mining queue, where miners compete to find a number with a value lower than the target set by the network. This number, known as a hash, contains encrypted information from previous blocks.

Mining serves to validate the transactions within a block and initiates the creation of a new one. Subsequently, nodes further verify the transactions through a series of confirmations, contributing to the formation of a chain of blocks, or the blockchain, containing transaction information.

Bitcoin Halving effects

Investing

Bitcoin was originally conceived not as an investment vehicle, but as a decentralized payment system aimed at eliminating the need for intermediaries like regulatory bodies or third parties in transactions.

However, it gained popularity among investors once its potential for generating profits became apparent. This led to an influx of investors into the cryptocurrency space, driving up demand for Bitcoin. The creators of Bitcoin may not have anticipated this surge in demand from investors.

For investors, a Bitcoin halving signifies a reduction in the supply of new coins, potentially increasing their investment value if historical trends persist. However, this positioning of Bitcoin as an investment vehicle introduces an element of speculation, as investors are essentially banking on future gains.

Mining

Miners, whether individuals, groups, or businesses, engage in mining primarily for its profitability. When miners receive new Bitcoins as rewards, they have historically reaped substantial profits. Despite Bitcoin's price fluctuations over time, mining has remained a lucrative venture; otherwise, large mining enterprises would not have persisted.

However, halving events diminish mining rewards, reducing the profitability of mining with each occurrence, especially if Bitcoin prices remain stagnant or decline. Large-scale mining operations require significant financial investments and energy consumption to stay competitive. These operations entail ongoing maintenance, staffing, and upgrades to sustain their position in the industry.

For example, Marathon Digital Holdings, a major mining company, substantially expanded its Bitcoin holdings and miner fleet by February 2024, likely in anticipation of the upcoming halving and the need to maintain competitiveness by increasing hashing power and liquidity.

Smaller miners face greater challenges with decreasing rewards. Those participating in mining pools may see diminished rewards, even in the event of price increases. While halving halves the reward, Bitcoin's price is unlikely to double to sustain current profitability unless a significant market event occurs.

Inflation

Halving the Bitcoin reward aims to tackle concerns related to inflation, which refers to the decrease in purchasing power of currency over time. In the U.S., inflation is assessed by the cost of a standard basket of goods, with a typical target rate set by central banks at around 2%. However, this target is often more aspirational than attainable.

The Bitcoin Halving is designed to mitigate potential inflationary impacts on Bitcoin by reducing the reward and preserving its scarcity. Nonetheless, this inflation-mitigating mechanism doesn't shield Bitcoin users from the inflationary pressures of fiat currency, which is necessary for Bitcoin conversion in economic transactions.

While gains in market value may offer some protection against inflation for investors, this does not extend to Bitcoin's original purpose as a payment method.

Demand

With each halving event, the reduction in the supply of new Bitcoins typically leads to increased demand for them. This trend is evident when observing Bitcoin's price following past halving events, as it has consistently tended to rise.

Consumers

A Bitcoin halving can impact consumers and retail users who hold Bitcoin. Those who acquire Bitcoin for transactions may experience fluctuations in its value, which could mirror or deviate from pre-halving patterns.

Similarly, individuals using Bitcoin for remittances face similar implications as shoppers. The worth of their remittances hinges on Bitcoin's market value post-halving.

What occurs during a Bitcoin halving?

The concept of "halving" in Bitcoin refers to the reduction in the number of tokens rewarded, aiming to simulate diminishing returns and potentially increase demand.

Why do halvings happen more frequently than every 4 years?

The Bitcoin mining algorithm aims to find new blocks approximately every 10 minutes. However, the actual time can vary, affecting the interval between halving events. For instance, if blocks consistently take an average of 9.66 minutes to mine, it would take about 1,409 days to mine the required 210,000 blocks for a halving event.

What occurs when all Bitcoins have been mined?

It's commonly projected that by 2140, the final bitcoin will be mined. However, as the reward halves every 210,000 blocks, it progressively diminishes until one satoshi is the reward, leaving a total circulation of 21 million bitcoins. A satoshi is the smallest unit of Bitcoin at 0.00000001 bitcoin and cannot be halved.

Bitcoin halving cuts the rate of new bitcoins entering circulation by half. This process is anticipated to continue until around 2140 when the maximum limit of 21 million bitcoins is expected to be reached.

Initially, in 2009, each mined block rewarded 50 bitcoins. After the first halving, it reduced to 25, then 12.5, and further to 6.25 bitcoins per block since May 11, 2020. Another halving is projected in April 2024.

The halving has significant ramifications for the Bitcoin network. It could lead to consolidation among miners, with smaller entities possibly exiting the mining sphere or being acquired by larger players.