All You Need to Know About Bitcoin Halving
Anyone interested in crypto (or anyone who hasn't been living under a rock in the middle of a desert island for the last ten years) has heard of Bitcoin. This largest and most expensive cryptocurrency regularly makes world headlines, making thousands of crypto enthusiasts dream of at least one BTC among their investment assets.
One of the reasons for the popularity of Bitcoin is its price, which exceeds the market value of all other cryptocurrencies. In turn, among other things, it is kept at such a high level because the supply of BTC is exhaustive, with an upper limit set at 21 million coins, which is predicted to be reached in 2140.
How can one ensure that Bitcoin mining rates are slow enough that this goal is not reached too early? Satoshi Nakamoto, the legendary creator of the blockchain, solved this problem in a simple and elegant way by implementing the concept of Bitcoin halving. What is it and why is it critical to the world's leading cryptocurrency? Let's figure it out together.
Bitcoin halving: What’s that and why is it important?
Bitcoin halving is one of the most significant repetitive events for BTC that occurs every four years, irreversibly changing the blockchain. We will discuss it from three aspects: what it is, how it happens, and why it is crucial to Bitcoin.
What is Bitcoin halving?
First things first, let’s articulate what Bitcoin halving is. Here’s how it could be defined:
Bitcoin halving is an event in the Bitcoin blockchain protocol where the reward provided to miners for successfully mining a new block is reduced by half.
That’s the definition, and, for some readers with more in-depth knowledge of blockchain technology, it would be more than enough. However, if you require more explanation, we’ll be glad to provide it. And we’ll start with determining what Bitcoin mining is and how it works.
Mining is a process that’s typical to blockchains using the Proof-of-Work (PoW) consensus algorithm. In terms of BTC mining, individuals or groups referred to as “miners” use specialized computer hardware to validate and process transactions on the Bitcoin blockchain by solving complex cryptographic puzzles. Once the necessary number of puzzles is solved, a new block is added to the blockchain. For this, the miner who added the new block receives a reward, which is currently 6.25 BTC.
So, what does Bitcoin halving have to do with this? You see, before May 11, 2020, the miners’ reward for adding new blocks was 12.5 BTC. And before July 9, 2016, it was 25 BTC. And even earlier, in the period between 2012 and 2016, you could have gotten 50 BTC for adding one block to the blockchain!
Why did the amount of the reward change so dramatically? Well, that’s because of Bitcoin halvings. Thus, each time 210,000 blocks are added to the Bitcoin blockchain (which happens every four years, give or take a few months) the miners’ reward gets reduced by half and stays such until the next halving, when it’s reduced by half again. And so on, and so on, until the last Bitcoin is mined.
But how does it happen? Let’s talk about this next.
How does Bitcoin halving work?
Upon learning the information above, one could have a rather logical question: amid Bitcoin’s renowned decentralization and lack of any ruling bodies determining the blockchain’s internal monetary policy, who decides that it’s time for the halving to occur and puts this decision into action?
To put it simply, Bitcoin halving does not need any person’s or governing body’s involvement to happen. Rather, it results from the predetermined rules embedded in the Bitcoin protocol itself. In other words, this event is hardcoded into the Bitcoin blockchain. As soon as a particular block height is reached indicating that 210,000 blocks have been mined, the halving event occurs, and miners’ block reward gets reduced by half.
Although the schedule of Bitcoin halvings could be forecasted (with an accuracy of up to a month), these events are not preceded by specific warnings or announcements, and there are no specific dates they are appointed for. The exact date and time of each halving event is not known in advance but calculated based on the average block mining time of about 10 minutes and the predetermined block height at which the halving is to occur.
When the halving happens, miners are the first to notice this by observing the reduction in block rewards. Afterwards, the information about the event spreads through community discussions, online forums, social media, and news outlets. And that’s how the world outside the Bitcoin community learns about it.
Why is Bitcoin halving important?
Now that we know what’s Bitcoin halving and how does it work, it is just about time to ask the main question: what’s its purpose? Why is the Bitcoin network programmed to reduce the miners’ rewards every time 210,000 blocks are mined and how could it possibly be beneficial to anyone?
Well, there are a few main reasons due to which Bitcoin halving is not just important but crucial to normal functioning of the blockchain in the long run. Here they are:
- Bitcoin halvings help control the supply and demand processes in the Bitcoin network. By gradually reducing block rewards, Bitcoin halvings prevent a sudden influx of new coins and subsequent inflationary pressures. Instead, it ensures a predictable and diminishing supply over time, fostering the perception of Bitcoin as a deflationary asset with scarcity at its core.
- Bitcoin halvings postpone the moment when we’ll run out of Bitcoins. With a maximum supply of 21 million Bitcoins, each halving event extends the longevity of the available coins. Halvings slow down the rate at which new Bitcoins are introduced into circulation, so that the maximum amount is not likely to be reached sooner than in 2140.
- Bitcoin halvings introduce scarcity to the system, raising demand for BTC and pushing the coins’ market value As the halving events occur, the available supply becomes scarcer, making each Bitcoin relatively more valuable. The combination of limited supply and demand on the rise creates favorable conditions for upward price fluctuations, making Bitcoin halvings important catalysts for price appreciation.
- Bitcoin halvings create intra-network economic implications, prompting miners to continue participating in the network. Any decrease in block rewards motivates miners to prioritize transaction fees, which are attached to each transaction, as an essential component of their income. Consequently, Bitcoin halvings encourage miners to compete for transactions with higher fees, maintaining active and stable functioning of the network.
Bitcoin halving is a crucial event that impacts the Bitcoin ecosystem to an extent that couldn’t be overestimated. By reducing the reward for miners by half every 210,000 blocks, Bitcoin halving controls the supply of Bitcoins, ensuring a predictable and diminishing supply over time, extending the longevity of available coins, introducing scarcity, and creating economic incentives for miners. Without them, not only would Bitcoin’s maximum supply of 21 million be reached much faster, but also the controlled inflation and supply-demand mechanisms built into the blockchain would be jeopardized, leading to potential catastrophic consequences for the BTC price fluctuations.
Therefore, Bitcoin halvings play a crucial role in the functioning of the Bitcoin blockchain and maintaining the stable rates of Bitcoin trading. While they keep occurring regularly, you may be sure that the world’s top coin will not run out of supply any time soon, and you’ll always be able to buy BTC or other cryptos to your liking quickly and easily.
Disclaimer: Our content does not constitute financial advice. It is only intended for informational and educational purposes.