What is Bitcoin Halving and How Does it Affect the Supply and Price?
When someone mines Bitcoin they’re given a reward – halving simply means that the reward they get for their work is, unsurprisingly, halved.
The last halving event took place on May 11, 2020, when the reward for mining new blocks was cut from 12.5 Bitcoins to 6.25 Bitcoins.
Halving occurs once every 210,000 blocks and happens approximately every four years until all the 21 million (or thereabouts) Bitcoins are mined, sometime around 2140.
Bitcoin mining today is expensive – specialist equipment and vast amounts of electricity are used to keep the blockchain in order and Bitcoin transactions flowing freely around the globe.
Mining a block to receive a reward takes approximately 10 minutes, meaning around 144 blocks per day on average are found. This equates to some 900 Bitcoins freshly minted Bitcoins per day at the current reward rate.
Why the halving formula was chosen remains a mystery to this day. Given the fact that the pseudonymous creator of Bitcoin, Satoshi Nakamoto, has vanished into thin air, we may never know.
Some have speculated that early writings by Satoshi (who may be an individual or group of people) hint that it was simply a way to control the distribution of coins at a constant rate, while weighing up the effects of inflation and deflation on the cryptocurrency.
Whether this is true or not, halving events are important because they reduce the number of new Bitcoins produced thus limiting the supply to the market.
Halving events are often surrounded by hype because many financial commentators and Bitcoin enthusiasts believe they lead to price increases.
While immediate impacts on the market have been small historically, there have been gradual increases in the price of Bitcoin after each halving event so far.
Some commentators believe this is a delayed response to the halving, while others would argue that halvings are already priced into the market because there is a certain degree of predictability about them.
If a halving event doesn’t increase price and demand, then it begs the question: what is the incentive for miners to continue operating?
Fortunately, Bitcoin is clever and solves this problem by featuring a process which allows for the difficulty involved in earning a reward to be tweaked.
If a halving event does not see the value of Bitcoin increase, then the mining difficulty settings can be reduced to ensure that miners are motivated to continue their work.
Simply put, although the reward may have been reduced, miners have to put less effort in to receive it.
Bitcoin launches - January 3, 2009 – block reward 50 BTC
Halving 1 - November 28, 2012 at block number 210,000 – block reward now 25 BTC
Halving 2 - July 9, 2016 at block number 420,000 – block reward now 12.5 BTC
Halving 3 - May 11, 2020 at block number 630,000 – block reward now 6.25 BTC
Halving 4 - Expected 2024 at block number 840,000 – block reward now 3.125 BTC
Halving 5 – Expected 2028 at block number 1,050,000 – block reward now 1.5625 BTC
This table covers the halvings expected this decade, but these events will continue until around 2140.
After the last Bitcoin halving in or around 2140 miners will no longer receive block rewards, but this doesn’t mean their income will disappear.
Each Bitcoin transaction that’s made also earns miners a small fee for facilitating it. Currently it’s expected that this will become the main source of income for Bitcoin miners.
Of course, other developments may supersede this, but baring any huge leaps forward in medical science, no-one involved in the process today will be around to see how the future of Bitcoin ultimately develops!