Cryptocurrencies have their own unique characteristics that challenge the current financial system. One of Bitcoin’s main characteristics is that it has a limited coin supply, unlike governmental currency. The proposed limit is 21 million coins and is said to be reached in 2140 after consecutive Bitcoin halving events. What is Bitcoin halving? Well, it’s an event that occurs when the reward for mining transactions is cut in half.
How Does Bitcoin Operate?
Before understanding Bitcoin halving, we’ll have to understand how the Bitcoin blockchain operates. The Bitcoin blockchain is a peer-to-peer network operated by distributed computers or nodes. To keep the network legitimate, each full node is responsible for verifying transactions before adding them to a block. Since the blockchain is distributed, a consensus mechanism has to be established in order to avoid double spending, and in order to create a clear sequence among nodes.
Bitcoin operates on a proof-of-work consensus. Miners using the PoW consensus compete against each other to solve a complex computational puzzle. The first miner to successfully solves it will be rewarded with cryptocurrency and get the block validated into the blockchain.
What Is Bitcoin Halving?
The mining reward was 50 BTC when Bitcoin was first established. This way, miners were tempted to mine blocks on the network long before the blockchain proved its success. However, this amount was cut in half after the network mined 210,000 blocks to become 25 BTC after 4 years of its establishment.
Cutting the mining reward in half is referred to as Bitcoin halving, which occurs every 4 years, or after 210,000 mined blocks. The Bitcoin halving event will continue until the proposed limit of 21 million coins is reached, which is expected to be in 2140. By then, the mining reward will reach zero, and Bitcoin miners will only be rewarded for processing transactions, instead of mining new currencies.
Until now, the Bitcoin network has had three halving events. The first halving event occurred in 2012, splitting the mining reward from 50 BTC to 25. The second event took place after 4 years in 2016 when the reward became 12.5 BTC. And finally, the last Bitcoin halving occurred in 2020, where each new block mined generated only 6.25 BTC. The next halving event is scheduled to be in 2024 when the reward will become 3.125 BTC.
The reasoning behind the 4 year-interval relates to how the Bitcoin mining algorithm is programmed. The Bitcoin network looks for new blocks every ten minutes. Blocks on average take 9.66 minutes to mine, which would take 1,409 days (4 years) to mine the 210,000 blocks required.
Why Does It Occur?
So, why does Bitcoin halving occur in the first place? Well, since Bitcoin’s supply is limited to 21 million coins, Bitcoin halving assures that the quantity of Bitcoin mined will drop over time. This way, miners would not have much incentive to mine new coins. Miners are encouraged to mine blocks of transactions as Bitcoin prices rise, even if the mining reward is cut in half. However, if prices drop along with Bitcoin’s halving, miners will lose incentives.
Does It Affect Bitcoin’s Price?
The supply of available Bitcoin decreases with each halving event, which raises the value of the cryptocurrencies to be mined. For example, the first halving occurred in 2012 when Bitcoin was only $12. After a year from the halving event, the Bitcoin price shot up to $1000. The same thing happened in 2016 when it went from $670 to $2,550 within a year.
When making a market study, Bitcoin halving is the bullish event everyone is waiting for. In addition, the Bitcoin halving counteracts inflation and keeps the amount of Bitcoin in circulation at a constant rate. This is because Bitcoin’s infrastructure is designed to be a deflationary asset.
However, some speculate that as rewards diminish, the rising demand will not be able to keep up with the rising costs to mine Bitcoin. And thus, people might start abandoning the network. Here, altcoins and Ethereum might become more appealing as investments.
Although the Bitcoin halving has some effects on the price of the cryptocurrency, other factors play major roles in its fluctuation.
Bitcoin After the 21 Million Mark
As of April 2023, about 19.3 million Bitcoins have been released in circulation, which leaves around 1.68 million left to be released. The next halving event is expected to fall on April 6, 2024. Analysts are expecting it to be the next bull run. However, what will happen after Bitcoin reaches its finite supply of 21 million? Will Bitcoin be even relevant by then? Well, miners by then will keep getting rewards by verifying transactions.
Satoshi Nakamoto, Bitcoin’s founder, encoded certain predefined rules that would govern Bitcoin as a decentralized network with a finite supply instead of having currency printed to oblivion by a government. This is part of Web3’s ethos of decentralization, where demand and supply are not governed by a central authority, and rules are always constant.