What is bitcoin halving

Bitcoin Halving – A Beginner’s Guide

By: Ofir Beigel | Last updated: 1/13/21

What is the Bitcoin Halving? What does it mean? When does it happen? What happens to the value of bitcoin when it does happen? In this post I’ll answer these questions and more.

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Bitcoin Halving Summary

Every 4 years on average (210K blocks) the reward granted to Bitcoin miners for adding a block to the blockchain is cut in half. The Bitcoin halving was designed by Satoshi Nakamoto to keep Bitcoin’s inflation in check.

Since the halving basically cuts the supply of new Bitcoins in half, many believe this event will have a dramatic effect on Bitcoin’s price.

That’s the Bitcoin halving in a nutshell. If you want a more detailed explanation Halving keep on reading, here’s what I’ll cover:

1. What does Bitcoin Halving Mean?

To understand what The Bitcoin Halving is, you must first understand the basics of Bitcoin mining. In short, new Bitcoins come into the world as a reward for miners whenever they mine a Bitcoin block.

When Satoshi Nakamoto set up the rules for the Bitcoin protocol he stated two important things, among others:

First, that the supply of Bitcoin is finite and limited to 21 Million. Second, that the number of bitcoins generated per block i.e. the reward is set to decrease by 50% every 210,000 blocks.

How long does it take for Bitcoin to be halved?

Since 6 blocks are found on average within an hour and halving happens once every 210,000 blocks, then every 4 years (give or take) there will be a halving event.

This basically means that the mining reward will be reduced by 50% from what it used to be. For example, if today each miner receives 6.25 Bitcoins for solving a block, after the next halving event they will receive only 3.125 Bitcoins and so forth.

Of course the fact that 21 million Bitcoins have been generated doesn’t mean that there are actually 21 million Bitcoins that can be spent. You need to take into account that there are many lost Bitcoins which will never be recovered (it’s assumed that 1/3 of the Bitcoins mined until today were lost).

Why should we even have a halving event?

Why the change? Why not keep the reward the same? Isn’t that unfair to the miners? The answer to that question lies in the law of supply and demand.

If the coins are created too quickly, or there’s no end to the number of bitcoins that can be created; eventually there will be so many bitcoins in circulation that they would have very little value.

Vitalik Buterin, the lead developer of the Ethereum project, wrote an op-ed piece for Bitcoin Magazine and explains the need for slowing the distribution of bitcoins through halving this way:

“The main reason why this is done is to keep inflation under control.

One of the major faults of traditional, “fiat”, currencies controlled by central banks is that the banks can print as much of the currency as they want, and if they print too much, the laws of supply and demand ensure that the value of the currency starts dropping quickly.

Bitcoin, on the other hand, is intended to simulate a commodity, like gold. There is only a limited amount of gold in the world, and with every gram of gold that is mined, the gold that still remains becomes harder and harder to extract.

As a result of this limited supply, gold has maintained its value as an international medium of exchange and store of value for over six thousand years, and the hope is that Bitcoin will do the same.”

2. When Will the Next Halving Occur?

Since we know the average block generation time (10 minutes) we can estimate that the next halving event should occur somewhere around February 2024.

There are websites that show you a countdown until the next event.

Having said that, some community members have noticed that in fact, since the creation of Bitcoin, a new block has been created every 9 minutes and 20 seconds on average and not every 10 minutes as presumed.

This is 7% faster than the presumed time of 10 minutes.

3. How Will the Bitcoin Halving Affect Bitcoin’s Price?

Of course the main question people want to know is “will this affect Bitcoin’s price?” and the answer is “nobody knows”.

In 2016, a week after the halving event, not much happened to the exchange rate of bitcoin against the US dollar. While bitcoin was trading at around 650 US dollars at the time of the event, a week later the rate was about 675, so not much of a change.

Additionally, on November 28th 2012 the first Bitcoin halving occurred when block 210,000 was solved. Back at the time Bitcoin’s price was $13.42 and the halving didn’t seem to affect the price that much. Indeed, shortly after Bitcoin’s price spiked to $230, but many attribute that to the Cyprus bailout.

Still, there are arguments in favour of two scenarios – either the price will rise, or nothing will change.

Some claim that the halving event is well known to the community and therefore will not surprise anyone or cause a major change in Bitcoin’s price.

Others claim that due to shortage in “Bitcoin supply” the price is bound to climb as demand will increase. However no one seems to think that the halving may lower the price of Bitcoin in any way.

4. Frequently Asked Questions

What Year Will the Last Bitcoin be Mined?

Following the halving math, the final number of Bitcoins will be roughly 21 million (20999999.9769 to be exact) by the year 2140.

Will Bitcoin Mining Ever End?

No. As long as Bitcoin exists mining will be needed. Once all Bitcoins are mined miners will continue to be compensated through transaction fees.

How Many Bitcoins are Mined per Day?

On average 144 blocks are mined each day (24 hours a day * 60 minutes per hour / 10 minutes per block) which means that 1,800 Bitcoins are mined per day on average.

4. Conclusion

Bitcoin was designed to be valuable. To support this the specific rules were set.

There will only ever be a specific number of Bitcoins in existence (21 million) and inflation is kept in check by slowing its distribution through the process of halving.

I hope this gives you a better idea of what bitcoin halving is, and why it’s an important feature of what gives bitcoin its value.

You may still have some questions or comments. If so, just leave them in the comment section below.

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Bitcoin Halving

What Is a Bitcoin Halving?

Bitcoin’s most recent halving occurred on May 11, 2020. To explain what a bitcoin Halving is, we must first explain a bit about how the bitcoin network operates.

Bitcoin’s underlying technology, blockchain, basically consists of a collection of computers, or nodes, that run bitcoin’s software and contain a partial or complete history of transactions occurring on its network. Each full node, or a node containing the entire history of transactions on bitcoin, is responsible for approving or rejecting a transaction in bitcoin’s network. To do that, the node conducts a series of checks to ensure that the transaction is valid. These include ensuring that the transaction contains the correct validation parameters, such as nonces, and does not exceed the required length.

A transaction occurs only after all the parties operating in bitcoin’s network approve it within the block that the transaction exists in. After approval, the transaction is appended to the existing blockchain and broadcast to other nodes. The blockchain serves as a pseudonymous record of transactions (i.e., its contents are visible to everyone but it is difficult to identify transacting parties in the network). This is because the blockchain assigns encrypted addresses to each transacting party in the network. That said, even those who do not participate in the network as a node or miner can view these transactions taking place live by looking at block explorers.

More computers, or nodes, added to the blockchain increase its stability and security. There are currently 9,704 nodes estimated to be running bitcoin’s code. While anyone can participate in bitcoin’s network as a node, as long as they have enough storage to download the entire blockchain and its history of transactions, not all of them are miners.

Key Takeaways

• A bitcoin halving event is when the reward for mining bitcoin transactions is cut in half.
• This event also cuts in half bitcoin’s inflation rate and the rate at which new bitcoins enter circulation.
• Both previous halvings have correlated with intense boom and bust cycles that have ended with higher prices than prior to the event.
• Bitcoin last halved on May 11, 2020, around 3 pm EST, resulting in a block reward of 6.25 BTC.

Bitcoin Mining

Bitcoin mining is the process where people use their computers to participate in bitcoin’s blockchain network as a transaction processor and validator. Bitcoin uses a system called Proof of Work (PoW). This means that miners must prove they have put forth effort in processing transactions to be rewarded. This effort includes the time and energy it takes to run the computer hardware and solve complex equations.

Faster computers with certain types of hardware yield larger block rewards and some companies have designed computer chips specifically built for mining. These computers are tasked with processing bitcoin transactions and they are rewarded for doing so.

The term mining is not used in a literal sense but used as a reference to the way precious metals are gathered. Bitcoin miners solve mathematical problems and confirm the legitimacy of a transaction. They then add these transactions to a block and create chains of these blocks of transactions, forming the blockchain. When a block is filled up with transactions, the miners that processed and confirmed the transactions within the block are rewarded with bitcoin.

Transactions of greater monetary value require more confirmations to ensure security. This process is called mining because the work done to get new bitcoin out of the code is the digital equivalent to the physical work done to pull gold out of the earth.

El Salvador made Bitcoin legal tender on June 9, 2021. It is the first country to do so. The cryptocurrency can be used for any transaction where the business can accept it. The U.S. dollar continues to be El Salvador’s primary currency.

Bitcoin Halving

After every 210,000 blocks mined, or roughly every four years, the block reward given to bitcoin miners for processing transactions is cut in half. This cuts in half the rate at which new bitcoin is released into circulation. This is bitcoin’s way of using a synthetic form of inflation that halves every four years until all bitcoin is released and is in circulation.

This system will continue until around the year 2140. At that point, miners will be rewarded with fees for processing transactions that network users will pay. These fees ensure that miners still have the incentive to mine and keep the network going. The idea is that competition for these fees will cause them to remain low after halvings are finished.

The halving is significant because it marks another drop in bitcoin’s dwindling finite supply. The total maximum supply of bitcoin is 21 million. As of May 2021, there are about 18,715,050 million bitcoins already in circulation, leaving just 2,284,950 million left to be released via mining rewards.

In 2009, the reward for each block in the chain mined was 50 bitcoins. After the first halving it was 25, then 12.5, and it became 6.25 bitcoins per block as of May 11th, 2020. To put this in another context, imagine if the amount of gold mined out of the earth was cut In half every four years. If gold’s value is based on its scarcity, then a «halving» of gold output every four years would theoretically drive its price higher.

Halving Implications

These halvings reduce the rate at which new coins are created and thus lower the available supply. This can cause some implications for investors as other assets with low supply, like gold, can have high demand and push prices higher.

In the past, these bitcoin halvings have correlated with massive surges in bitcoin’s price. The first halving, which occurred on November 28, 2012, saw an increase from $12 to $1,207 on Nov. 28, 2013. The second bitcoin halving occurred in July 9, 2016. The price at that halving was $647 and on Dec. 15, 2017, bitcoin’s price had soared to $19,345. The price then fell over the course of a year from this peak down to $3,255 on December 15, 2018, a price 403% higher than its pre-halving price.

The most recent halving occurred on May 11, 2020. On that date, bitcoin’s price was $8,821. On April 12, 2021, bitcoin’s price soared to $63,558 (an astonishing 651% increase from its pre-halving price). A month later later, on May 11, 2021, bitcoin’s price was $49,504, representing a 461% increase that seems more consistent with the behavior of the 2016 halving.

On May 12, 2021, Elon Musk, CEO of Tesla, announced that Tesla would no longer accept bitcoin as payment, resulting in further price fluctuations. In the week that followed Mr. Musk’s statements, the price of bitcoin plunged below $40,000 after Chinese regulators announced restrictions banning financial institutions and payment companies from providing cryptocurrency-related services. While these two announcements may have temporarily created a price drop in bitcoin, there is the potential that the price fluctuations are related more to the halving behavior we have observed previously.

The theory of the halving and the chain reaction that it sets off works something like this:

The reward is halved → half the inflation → lower available supply → higher demand → higher price → miners incentive still remains, regardless of smaller rewards, as the value of bitcoin is increased In the process

In the event that a halving does not increase demand and price, then miners would have no incentive as the reward for completing transactions would be smaller and the value of bitcoin would not be high enough. To prevent this, bitcoin has a process to change the difficulty it takes to get mining rewards, or, in other words, the difficulty of mining a transaction. In the event that the reward has been halved and the value of bitcoin has not increased, the difficulty of mining would be reduced to keep miners incentivized. This means that the quantity of bitcoin released as a reward is still smaller but the difficulty of processing a transaction is reduced.

This process has proven successful twice. So far, the result of these halvings has been a ballooning in price followed by a large drop. The crashes that have followed these gains, however, have still maintained prices higher than before these halving events. For example, as mentioned above, the 2017–2018 bubble saw bitcoin rise to around $20,000, only to fall to around $3,200. This is a massive drop but bitcoin’s price before the halving was around $650. While this system has worked so far, the halving is typically surrounded by immense speculation, hype, and volatility, and it is unpredictable as to how the market will react to these events in the future.

This process has proven successful in the first two halvings, and in observing the price trends since the third halving in May 2020, it appears to be consistent. So far, the result of these halvings has been a ballooning in price followed by a large drop. The crashes that have followed these gains, however, have still maintained prices higher than before these halving events.

For example, as mentioned above, the 2017–2018 bubble saw bitcoin rise to around $19,345, only to fall to around $3,255.4 This is a massive drop but bitcoin’s price before the halving was $647. While this system has worked so far, halvings in general are typically surrounded by immense speculation, hype, and volatility, and it is unpredictable as to how the market will react to these events in the future.

The third halving occurred not only in a global pandemic, but also in an environment of heightened regulatory speculation, increased institutional interest in digital assets, and celebrity hype. Given these additional factors, where bitcoin’s price will ultimately settle in the aftermath remains unclear.

Frequently Asked Questions

What happens when a Bitcoin halves?

The term «halving» as it relates to bitcoin has to do with how many bitcoin tokens are found in a newly created block. Back in 2009 when bitcoin launched, each block contained 50 BTC, but this amount was set to be reduced by 50% roughly every 4 years. Today, there have been three halving events and a block only contains 6.25 BTC. When the next halving occurs, a block will only contain 3.125 BTC.

When have the halvings occurred?

The first bitcoin halving occurred on November 28, 2012, after a total of 5,250,000 BTC had been mined. The next occurred on July 9, 2016, and the latest on May 11, 2020. The next is expected to occur in the Spring of 2024.

Why are the halvings occurring less than every 4 years?

The bitcoin mining algorithm is set with a target of finding new blocks once every ten minutes. However, if more miners join the network and add more hashing power, the time to find blocks will decrease. This is remedied by resetting the mining difficulty, or how hard it is for a computer to solve the mining algorithm, once every two weeks or so to restore a 10-minute target. As the bitcoin network has grown exponentially over the past decade, the average time to find a block has consistently been below 10 minutes (roughly 9.5 minutes).

Does halving have any effect on Bitcoin’s price?

The price of bitcoin has risen steadily and significantly since its launch in 2009, when it traded for mere pennies or dollars, to April 2021 when the price of one bitcoin traded over $65,500. Since halving the block reward effectively doubles the cost to miners, who are essentially the producers of bitcoins, it should have a positive impact on price since producers will need to adjust their selling price to their costs. Empirical evidence does show that bitcoin price tends to rise in anticipation of a halvening, often several months prior to the actual event.

What happens when there are no more bitcoins left in a block?

Around the year 2140, the last of the 21 million bitcoin ever to be mined will have been. At this point, the halving schedule will cease, since there will be no more new bitcoins to be found. Miners, however, will still be incentivized to continue validating and confirming new transactions on the blockchain since the value of transaction fees paid to miners is thought to rise into the future. The reasons being a greater transaction volume that have fees attached, plus a greater nominal market value of bitcoins.

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