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What Is Bitcoin Halving? How Does It Work?

Bitcoin (BTC) halvings have become pivotal events in the crypto community. Although halvings only impact Bitcoin's issuance, they tend to have a significant influence on the entire crypto market. Some investors even believe the crypto market's booms and busts coincide with four-year Bitcoin halving cycles. 

So what is Bitcoin halving, and why does it have such a significant effect on the crypto space? Let’s find out.

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What is Bitcoin halving?

Bitcoin halving is a recurring event when the daily Bitcoin issuance gets cut in half. Specifically, the Bitcoin reward that Bitcoin miners receive for each block reduces by 50%. As this is the only way new Bitcoin gets created, this decreases new supply creation per time interval by a half. 

When Bitcoin launched in 2009, anyone who lent computing power to the network could’ve received 50 BTC per block as a mining reward for validating and adding new blocks. This 50 BTC prize is known as a block reward and serves as a powerful incentive to increase hash power on Bitcoin's network. 

However, due to Bitcoin halving, that mining reward is far less than 50 BTC. With each successive halving, these block rewards are slashed in half. Since 2009, the Bitcoin rewards have decreased to 25 BTC, 12.5 BTC, and 6.25 BTC per block. 

Bitcoin's founder Satoshi Nakamoto designed Bitcoin's code in such a way that after every 210,000 blocks, it’ll be slashed. Since it takes about 10 minutes to complete each block on Bitcoin's blockchain, halving events tend to occur every four years. 

How Bitcoin halving works

Bitcoin's proof-of-work (PoW) algorithm helps make these halving events possible. The PoW consensus mechanism requires that blockchain participants use computing power to solve complex algorithm puzzles. Every computer on the Bitcoin blockchain has a chance to verify new transactions, but those that provide more "work" have greater odds of success.

These Bitcoin miners trade their time and electricity for the chance to receive Bitcoin rewards. Each block that a computer produces gets network fees from users who submit transactions and a bonus BTC reward of newly minted coins. Nakamoto used these Bitcoin rewards as a "carrot" to encourage more people to add hash power to the Bitcoin network. The halving events are built into Bitcoin's code. Miners and investors can expect that these Bitcoin rewards will reduce by half roughly every four years. 

The halving events transparently dictate Bitcoin's daily issuance so people can adjust their market expectations accordingly. Halvings also help gradually lower the Bitcoin in circulation before it hits its maximum supply of 21 million. Since these block rewards keep getting sliced in half over many years, people have more time to adjust to Bitcoin's circulating supply.  

What's behind Bitcoin halving?

The main point of Bitcoin halvings is to gradually reduce the coin’s inflation rate to zero. When the 21 millionth Bitcoin is mined, the supply will be set forever. This feature makes Bitcoin a uniquely scarce asset, even in comparison to precious metals like gold. 

Although we know there’s a finite supply of gold, there’s always a chance someone can discover a new mine, thus unexpectedly increasing gold’s supply. With Bitcoin, everyone knows there’ll only be 21 million coins, which gives it a unique value proposition. The halvings help gradually reduce the Bitcoin issuance, so miners and investors have more time to prepare for the supply shock. 

Halvings also provide the Bitcoin blockchain with predictability. Unlike fiat currencies like the U.S. dollar, there's no ambiguity over Bitcoin’s inflation rate. Everybody knows that Bitcoin's block rewards will get cut in half every four years because it's built into the protocol. 

Remember, Nakamoto created Bitcoin as an alternative payment system during the 2008 financial crisis. They envisioned a digital currency that could resist central authority and increase in value over time. The Bitcoin halving event is a predictable inflation schedule that provides certainty to investors, miners, and market participants. 

Bitcoin halvings also have a dramatic effect on supply and demand. After each halving, there are fewer bitcoins to go around. As long as demand remains steady, this supply shock should increase the value of Bitcoin.

Interestingly, all previous Bitcoin halvings preceded a major "boom and bust" cycle in the crypto market. Although Bitcoin tends to rise and crash after a halving event, it generally stays well above the highs of the previous halving cycle. 

Another important piece worth remembering is that demand must remain steady for the price of Bitcoin to rise after a halving. If people lose faith or interest in Bitcoin, a halving event will have minimal influence on the market price.   

As for what's behind the 21 million Bitcoin supply, nobody's sure. There are many theories over why Nakamoto chose 21 million, including a reference to blackjack or a complex math equation multiplying the total blocks per cycle by the sum of all block rewards (210,000 x 100 = 21 million). To this day, nobody knows if there's a special significance behind the 21 million Bitcoin supply! 

Bitcoin halving history

There haven’t been many Bitcoin halvings so far in history, but each event has played a pivotal role in the crypto market. Here’s a quick overview of the previous Bitcoin halvings:

  • January 2009: Bitcoin launched with a block reward of 50 BTC per block. 
  • November 2012: First halving event cuts block reward to 25 BTC. 
  • July 2016: Second halving event reduces block reward to 12.5 BTC.
  • May 2020: Third halving event reduces block reward to 6.25 BTC. 

It's also worth mentioning that the 19 millionth Bitcoin hit the circulating supply in April 2021. That means that more than 90% of Bitcoin's supply is now in circulation, and only 2 million more Bitcoins are left to be mined. 

When is the next Bitcoin halving? 

As Bitcoin halvings tend to run in four-year cycles, the next Bitcoin halving should happen sometime in 2024. Most estimates suggest the Bitcoin reward will get slashed to 3.125 BTC in March 2024. 

However, Bitcoin will automatically initiate a halving after 210,000 blocks. Although the Bitcoin blockchain strives to create a new block every 10 minutes, this time can fluctuate depending on the total hash power. If more miners join in a short time, it can temporarily make the Bitcoin network faster or vice versa if miners suddenly leave the Bitcoin network. 

To help keep Bitcoin's block time steady, Nakamoto included a "difficulty adjustment" in Bitcoin's code. These difficulty adjustments scan Bitcoin's hash power every two weeks and change the complexity of the algorithmic puzzle. The more hash power there is, the more difficult the puzzle becomes to help slow down block verification.

Will the Bitcoin halving end?

The last Bitcoin halving will happen after the 21-millionth Bitcoin enters the market. Since there are now more than 19 million BTC in circulation, this may not seem like it's too far away. However, thanks to the halving events, most analysts believe Bitcoin won't hit its total supply until 2140.

Although we're a long way from Bitcoin's final halving event, there are concerns over maintaining high hash power on the Bitcoin network without block rewards. Would it be profitable for Bitcoin miners to run their computers if they only collect transaction fees and don’t receive Bitcoin from mining issuance?

Some developers argue that transaction fees won't be lucrative enough to keep people incentivized to donate their time and energy to Bitcoin mining. The lower the hash power on the Bitcoin network, the more prone it’ll be to security issues like a 51% attack.

Some crypto community members have even suggested transitioning Bitcoin to a proof-of-stake (PoS) consensus mechanism once it reaches its max supply. However, there are no indications Bitcoin’s developers are interested in moving away from PoW. 

In contrast, some believe transaction fees should be enough to incentivize miners in the future. Those who favor this argument believe that Bitcoin’s price will increase as more citizens, governments, and businesses use it. This means as more people buy Bitcoin, there’ll likely be higher transaction volume on the network. More Bitcoin transactions, coupled with a higher Bitcoin price, may translate to lucrative network fees.  

While it's impossible to say how Bitcoin will evolve over the next 100 years, Bitcoin's core developers must carefully monitor whether transaction fees are enough to keep Bitcoin's miners happy. 

Wrapping up 

Bitcoin halvings are in direct contrast to the monetary policies of fiat currencies––and that’s the point. Nakamoto wanted to create a scarce asset with a fixed supply and a decreasing inflation rate. These halvings help counter the inflationary policies of most other assets, which gives Bitcoin its unique value in 21st century finance. 

Remember that there's no guarantee that a Bitcoin halving will dramatically impact its price. Previous market cycles are no indication of future price action. Ultimately, crypto prices are a function of supply and demand; therefore, even if Bitcoin's supply reduces significantly, there must be enough buyers on the other end.

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