A Bitcoin halving event occurs when the reward for mining Bitcoin transactions is cut in half (including the inflation rate).
What is Bitcoin halving?
A "block" is a file on the Bitcoin blockchain that contains 1 MB of Bitcoin (BTC) transaction records. "Miners" compete to add the next block by solving a complex mathematical problem with specialized hardware, generating a random 64-character output known as a "hash," completing the process, and locking the block so it cannot be changed. Miners receive Bitcoin for completing these blocks.
So, how exactly does the Bitcoin halving cycle operate? When the cryptocurrency was first established, miners were paid 50 BTC per block. Even before it was clear how successful the network would be, early users could be enticed to mine it in this manner. Every 210,000 blocks mined, or roughly every four years until all 21 million Bitcoin have been mined, the rate at which new Bitcoin are created decreases by half.
According to Bitcoin halving dates history, the last three halvings occurred in 2012, 2016, and 2020. In 2012, the reward for mining a block was reduced from 50 to 25 BTC, resulting in the first Bitcoin halving or Bitcoin split.
After the 2016 halving event, incentives were reduced to 12.5 BTC for each block mined, and as of May 11, 2020, each new block mined only generates 6.25 BTC. The next Bitcoin halving is expected to take place in 2024. This system will operate until around 2140.
We will explain why Bitcoin halving occurs, how the Bitcoin halving cycle works, and why it is important in this guide.
Why does Bitcoin halving occur?
Every ten minutes, the Bitcoin mining algorithm searches for new blocks. As more miners join the network and add hashing power, the time it takes to find blocks will decrease. The mining difficulty is reset once every two weeks or so to restore a 10-minute objective. As the Bitcoin network has grown dramatically over the last decade, the average time to locate a block has consistently remained below 10 minutes (roughly 9.5 minutes).
The supply of Bitcoin is limited to 21 million units. When the total number of BTC reaches 21 million, the generation of new BTC will cease. The halving of Bitcoin ensures that the amount of Bitcoin that can be mined per block decreases over time, making BTC more scarce and valuable.
The incentive to mine Bitcoin would logically decrease after each halving. Bitcoin halvings, on the other hand, are associated with massive increases in the price of BTC, providing miners with an incentive to mine more despite the fact that their payouts have been halved.
Miners are encouraged to keep mining as prices rise. Miners, on the other hand, may lose incentive to create more Bitcoin if the digital currency's price does not rise and block rewards are reduced. This is due to the fact that mining Bitcoin is a time-consuming and costly process that requires a lot of computer power and electricity.
Why does Bitcoin halving matter?
Bitcoin halving is typically accompanied by significant volatility in the cryptocurrency. The halving cycle reduces the supply of available Bitcoin, increasing the value of Bitcoins yet to be mined. Change brings with it the opportunity to profit.
The first halving occurred on November 28, 2012, when the price of BTC was around $12; one year later, Bitcoin had risen to nearly $1,000. The second halving took place on July 9, 2016, and Bitcoin's price dropped to $670 at the time before rising to $2,550 by July 2017. In December of that year, Bitcoin reached an all-time high of around $19,700. Bitcoin was worth $8,787 at the time of the most recent halving, in May 2020, and it has since exploded.
- More news about cryptocurrencies and Bitcoin.
- A fascination with the anonymity of digital assets.
- The currency's real-world use cases are gradually expanding.
If you believe in the power of history, previous Bitcoin halvings have been long-term bullish drivers for the cryptocurrency's price. The third halving of Bitcoin, on the other hand, is almost certain to have an impact on the BTC ecosystem in a variety of ways. The number of Bitcoin miners is widely expected to decline as the economic benefit of mining becomes less appealing and, for less effective miners, unprofitable.
The Bitcoin halving represents Bitcoin's deflationary tendency on a regular basis. Since its inception, this has been the core of the bull case for Bitcoin: Bitcoin, as a decentralized cryptocurrency, cannot be printed into oblivion by governments or central banks, and the total supply is completely known.
Implications of the Bitcoin halving event
In terms of the broader implications of halving, a lower mining reward for Bitcoin reduces the amount of money that miners can make by adding new transactions to the blockchain. The flow of new Bitcoin into circulation is determined by miner rewards. As a result of halving these payments, the influx of new Bitcoin is reduced. This is where supply and demand economics come into play. While supply falls, demand fluctuates (increases or decreases), causing price changes.
The halving event also reduces Bitcoin's inflation rate. Inflation is defined as the loss of purchasing power for something, in this case the currency. However, the fundamental infrastructure of Bitcoin is designed to be a deflationary asset. Halfing is critical to achieving this.
Bitcoin's inflation rate was 50% in 2011, but after halving in 2012, it dropped to 12% in 2012 and 4–5% in 2016. It now has an inflation rate of 1.77 percent. This means that the value of Bitcoin rises after each halving. Every halving event has historically resulted in a Bitcoin bull run. As supply decreases, the price rises, causing demand to rise. This upward trend, however, will be gradual.
Because of the high cost of powering the computers that solve the mathematical puzzles, the price of BTC would have to rise significantly for miners to receive half as many coins. Miners will struggle to stay competitive and in business if the price does not rise in lockstep with the inflation rate.
Miners will need to be as efficient as possible, so a new technology that can generate more hashes per second while using less energy and having lower overheads will be in demand.
Furthermore, there has been evidence of interest in the currency from a number of countries, and the economies of these countries may have an impact on the price of Bitcoin. More importantly, the price of Bitcoin is likely to rise as a result of increased visibility. The volume of transactions will only grow as more stores, small businesses, and even major institutions become involved with Bitcoin and the blockchain.
What if a significant number of miners abruptly dropped out of the race?
To understand this, we must first consider hash rate. The hash rate in Bitcoin mining is defined as the number of SHA256 computing operations performed per second. As the number of miners increases, this value rises, implying that the network is faster and more secure.
If a large number of miners leave at the same time, the network may experience a temporary bottleneck as users migrate to faster chains, making it easier for fraudulent users to take over large portions of the network.
However, historical evidence indicates that halving events do not result in this reaction. When the first halving occurred in 2012, Bitcoin's hash rate fell slightly between December 2012 and mid-February 2013. Following that, both the hash rate and the profitability of mining increased. As a result, once the dust settles, halving is beneficial to both miners and the network as a whole.
A similar scenario occurred during Bitcoin's second halving, but the positive effects were delayed. Although the hash rate increased steadily, mining profitability did not recover for nearly a year after the halving date. Mining profitability may suffer a long-term decline if this pattern continues for the following event.
When is the next Bitcoin halving event?
Over 18.5 million, or nearly 89 percent, of the 21 million BTC that can ever exist have been mined and are in circulation. Each day, approximately 900 new Bitcoin are mined and entered into digital circulation; however, faster mining rates have resulted in higher mining rates, so it is possible that the number is higher.
As halvings continue, the rate of Bitcoin supply increase will slow until all 21 million BTC have been mined; the last fractions of Bitcoin will be mined in 2140, according to predictions.
The reward for mining a block will be cut in half again in the future, but no date has been set. The answer will be revealed when the 210,000th block has been mined since the last halving.
Given that new Bitcoin are mined every 10 minutes, the next halving is expected in early 2024, when a miner's payout will be reduced to 3.125 BTC.