What is the Bitcoin Halving?

In a procedure euphemistically referred to as "Bitcoin halving," the quantity of Bitcoin distributed to cryptocurrencies miners is cut in half every four years (or halvening). This is both why it works and how it works.

Bitcoin’s supply limit

Before we can have a handle on the halving of Bitcoin's supply, we need to have a firm grasp on the theory that behind it.

Satoshi Nakamoto, who came up with the idea for Bitcoin, thought that scarcity may generate value in situations where there was none. After all, there is only one Mona Lisa, a predetermined number of Picassos, and a finite amount of wealth on this planet.

Bitcoin was a game-changer in that it made it possible to make a digital good rare for the first time ever. There will never be more than 21 million Bitcoin in circulation.

The operation of fiat currencies like the United States dollar is fundamentally incompatible with the concept of putting supply controls on Bitcoin. Initial laws for the creation of fiat currencies were quite strict. For example, in order for the United States government to issue one dollar, they needed to have a particular quantity of gold in reserve. This was the benchmark that everyone measured up to.

Over the course of time, these rules became less stringent as economies continued to modernize and as governments, in response to prolonged periods of extreme financial uncertainty (such as the Great Depression and World War II), printed more money to assist in the stimulation of weakening economies. Over the course of history, these regulations morphed into the current system, which allows governments to (generally speaking) issue money whenever they see fit.

Because Satoshi Nakamoto feared that the depreciation of fiat currency may have terrible implications, he used code to prohibit any one entity from being able to issue additional bitcoin. This ensured that the supply of bitcoin would remain stable.

What is the Bitcoin halving?

The hard limit of 21 million coins is programmed into the Bitcoin protocol itself. Mining generates new bitcoins, which are then distributed as block rewards. In exchange for their efforts in ensuring the integrity of the Bitcoin ledger and keeping it secure, miners are paid with freshly created Bitcoin.

However, the mining incentive is half every four years, and each halving slows the pace at which new Bitcoin is added to the supply. This process is expected to continue until 2140 at the earliest.

Did you know?

In 2009, Satoshi Nakamoto was the one who successfully mined the first million Bitcoin. Since that time, around 90 percent of the available Bitcoin have been mined, and it is estimated that there will only ever be 1.95 million additional Bitcoin generated in total.

A breif history

• In 2009, the incentives for mining Bitcoin were set at a minimum of 50 BTC each block.

• In 2012, the first Bitcoin halving occurs, bringing the total mining reward down to 25 BTC.

• In 2016, the mining payouts are reduced for the second time, this time to 12.5 BTC.

• In 2020, the mining incentives will be reduced to 6.25 BTC as part of the third halving.

• In 2140, no more Bitcoins will be generated once the 64th halving has taken place.

What’s so special about the halving?

If a person, organization, or government is trusted to establish the amount of money in circulation, then that same person, group, or government must also be trusted to maintain that amount of money in circulation. It is expected that Bitcoin would be decentralized and trustless, meaning that there will be no one in charge and no one to trust. Because Bitcoin is decentralized and not under the authority of any one person or organization, there must be stringent guidelines governing how much Bitcoin may be generated and how it can be distributed.

Because a total supply and halving event have been programmed into the Bitcoin code, the Bitcoin monetary system has been effectively frozen in time and is very difficult to alter. Because of this "hard cap," Bitcoin is comparable to "hard money" such as gold, the supply of which is almost difficult to alter.

What happens to Bitcoin miners?

Bitcoin miners must spend money on the specialized mining gear and the energy needed to power their rigs to generate bitcoins. The benefits they get for mining are sufficient to cover this expense, but what will happen if those payouts are cut in half?

Because the reward pool will be cut in half, there will be less of an incentive for miners to continue contributing to the Bitcoin network. This will result in fewer miners overall, which will make the network less secure.

For this reason, miners will (presuming there haven't been any substantial modifications to the Bitcoin protocol) get incentives in the form of transaction fees for running the network after all Bitcoins have been mined. This is because miners are responsible for keeping the network operational.

Miners presently create around 900 Bitcoin (approximately $33.5 million) per day, but earn between 60 and 100 Bitcoin (approximately $2.2 million to $3.7 million) in daily transaction fees. This indicates that transaction fees account for just a tiny fraction of a miner's overall earnings. This indicates that transaction fees presently account for no more than 6.5% of a miner's income; by the year 2140, this percentage will have increased to 100%.

"Transaction fees will likely rise in an inverse connection to, and as a compensation for, the falling mining yields," said Ben Zhou, CEO of crypto exchange ByBit, in an interview with Decrypt. "Transaction fees will likely grow in an inverted correlation to, and as a compensation for," Decrypt.

Before the last block is mined, there is also a possibility that the reward system for Bitcoin may be altered in some way. The proof-of-work consensus process that Bitcoin uses at the moment has been the subject of criticism from individuals such as Elon Musk, CEO of Tesla, due to the huge amount of energy it requires to function.

Alternative digital money The proof-of-work consensus method is being replaced with the less energy-intensive proof-of-stake consensus mechanism that Ethereum is in the process of converting to. In this consensus mechanism, the network is protected by having validators lock up, or "stake," their money. The Centre for Blockchain Technologies at University College London reports that proof-of-stake blockchains consume several orders of magnitude less energy than other types of blockchains.

Bitcoin may do the same thing. Niklas Nikolajsen, founder of Swiss cryptocurrency broker Bitcoin Suisse, was quoted as saying something along the lines of "I'm sure, once [proof of stake] technology is proven, that Bitcoin will adapt to it as well." This statement was made in an interview that was originally shot for the German television show "Galileo."

In spite of the fact that ecological organizations are advocating for a transfer to proof-of-stake, it is still very improbable that a significant number of Bitcoin validators would back a hard fork that converted the network over to an alternate consensus method.

Price impact

The discussion on whether or not the halvings of Bitcoin's supply have an effect on the price of the cryptocurrency or whether or not they have already been "priced in" continues to rage.

The diminishing number of bitcoins should, in accordance with the principles of supply and demand, lead to a rise in demand for bitcoins, which, in turn, should lead to an increase in price. According to one idea, which is referred to as the stock-to-flow model, a ratio is calculated based on the current supply of Bitcoin and how much is entering circulation. As you would expect, each halving has an effect on that ratio. On the other hand, some individuals have cast doubt on the fundamental premises upon which the theory is founded.

In the past, the price of Bitcoin has climbed following earlier occurrences involving halving the block reward. However, this gain did not occur immediately, and other variables were also a role.

After the half that took place in June 2016, the price of Bitcoin continued to trade horizontally until the end of the month, before reaching a low of $533 in August. The price of Bitcoin was about $660 at the time that the halving took place. Nevertheless, by the end of the year, the price of Bitcoin had skyrocketed to an all-time high of more over $20,000, representing a rise of 2,916%.

In a similar manner, the price of Bitcoin skyrocketed from just over $9,000 to over $27,000 at the end of the year as a result of the half that occurred in 2020; however, the price did not breach the $10,000 barrier in the two months that followed the halving. It is also important to note that other factors influenced Bitcoin's bull run in 2020. The most notable of these factors was the growing institutional investment from companies like MicroStrategy, and PayPal's decision to enable its users to buy and hold Bitcoin. Both of these decisions were important.

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