If you've been following Bitcoin, you've probably heard a bit about it. But what exactly is Bitcoin halving? When does it happen and what are the reasons behind it?
Bitcoin as digital gold
Let's go back to the basics. A common way of defining Bitcoin among investors is to call it “digital gold”. There is a lot of truth in this because, as with real gold, the supply of Bitcoin is limited. This means that the bitcoin network has a limit to the total number of BTC coins and one day there will be no more new Bitcoins. When that time comes, there will be a total of 21 million Bitcoins in circulation. To date, more than 18 million coins have been mined. So this means that there are still several million BTC waiting to join the circulation.
What is Bitcoin halving?
The bitcoin protocol is designed in such a way that every time 210,000 blocks are mined, the amount of Bitcoin given to miners as rewards is reduced by a predetermined amount. Every time you buy and sell BTC, these transactions can only happen because people scattered around the world use dedicated software on their high-performance computers to solve math problems to verify the transactions you enforce. The process of verifying these transactions is called mining.
In exchange for mining new blocks and verifying transactions, miners receive a certain reward volume. At the very beginning of the Bitcoin network, the reward for miners was 50 BTC for each mined block. However, since the creation of the Bitcoin protocol in 2009, there have already been several events referred to as "halving". First, the reward for one block was reduced to 25 BTC. Then to 12.5 BTC to reach the current 6.25 BTC in May 2020. Therefore, less and less coins are made available to miners, which leads to a decrease in the supply of new BTCs that are delivered to the market.
Why does halving occur?
The halving function was implemented in the Bitcoin code by its creator, Satoshi Nakamoto. The constant reduction of the BTC volume that goes into circulation is aimed at controlling the supply. If too many units of Bitcoin went into general circulation too quickly (as in the beginning), the most elementary economics says that their price would fall instead of stimulating the increase in the value of a particular coin.
The fact that new coins are produced means the money supply increases by a planned amount, but this does not necessarily result in inflation. If the supply of money increases at the same rate that the number of people using it increases, prices remain stable. If it does not increase as fast as demand, there will be deflation and early holders of money will see its value increase. - Satoshi Nakamoto
How does halving affect the price of BTC?
Halving is a tool of a specific nature. It makes Bitcoin rare. Consequently, this leads to the generation of value as long as the demand is the product. In the broadly understood cryptocurrency community that is centered around Bitcoin, halving is a very welcome event. This is because many people believe that it leads to higher prices.
At the stage of November 2012, the supply of Bitcoin fell by half for the first time. The effect of this event was a change in the price, which began to rise soon after the decrease in the volume of BTC that goes into circulation. Immediately after the first halving, the price of one BTC coin increased from USD 11 to USD 12, and then climbed steadily throughout the year, reaching USD 1038 exactly one year later.
Subsequently, the price quotations of the oldest cryptocurrency were subject to varied dynamics. An important moment on this bumpy road was July 2016. At that time, the price of a single Bitcoin coin dropped, but then gradually increased, then reaching $20,000 in December 2017.
The third halving took place on May 11, 2020, and the price of the king of cryptocurrencies reached a new All Time High just over a year later. Drawing conclusions from the history, we all know that BTC is gaining popularity constantly attracting new crowds of investors. We have learned that the price of Bitcoin is driven by many factors related to both classical economics and elements related exclusively or predominantly to the world of digital currencies itself.
The last halving
Have you ever wondered what happens when BTC rewards for miners are cut in half? First of all, you should be aware that the next halving of the Bitcoin network won't happen until around 2024, and this time the BTC rewards for miners will be halved to 3,125 BTC. On average, every 4 years, the reward for mining a single block in the Bitcoin network is halved, and when this happens, miners should always consider the profitability of their activity. As a consequence, this could lead to a situation where some of them could give up if the BTC price does not increase in response to the falling supply. You can be calm. Satoshi Nakamoto predicted such a scenario. Even if this were to happen, the Bitcoin network code provides a mechanism whereby the computing power of the protocol may decrease, and this will lead to the software automatically lowering the difficulty of verifying transactions in order to maintain the supply of new coins.
What happens when the last bitcoin has been mined?
After all 21 million BTC have been mined, the only way to reward miners who verify transactions as well as keep the network running will be through transaction fees. It is worth adding at this point that the final halving of the supply of new Bitcoin coins will not happen in the near future. This is because it is estimated to occur around 2140. Additionally, if needed, the protocol can be modified using tools such as the Bitcoin Improvement Proposal.