The cryptocurrency industry is gearing up for a very important event: the “halving“. Ready to discover together, what is the true importance of bitcoin halving and how it affects the BTC price in general?
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What is Bitcoin halving?
Halving is a periodic phenomenon that occurs approximately every four years on the Bitcoin blockchain. It is programmed to halve the reward given to Bitcoin miners when new blocks are created on the blockchain. This periodic reduction in the supply of new bitcoin units is designed to maintain the scarcity and value of the digital currency.
The halving of bitcoin is often surrounded by speculation in the investment community. It typically has a significant impact on supply and demand, influencing the crypto’s price.
The origin of bitcoin halving
The genesis of bitcoin halving goes back to the very conception of Bitcoin by its creator, the famous Satoshi Nakamoto. When Bitcoin was created in 2008 and the protocol implemented in 2009, Nakamoto established a set of rules to control bitcoin production and guarantee controlled growth in supply.
One of these rules is the reduction of miners’ fees every 210,000 blocks mined: the halving. This is equivalent to around four years, given the rate at which blocks are created (1 block every ~10 minutes).
Bitcoin’s operation is based on a set of immutable rules enshrined in its code. One of the fundamental rules is the absolute limit on the quantity of Bitcoins in circulation, capped at 21 million. This intrinsic scarcity is one of the parameters that gives BTC its value.
It is estimated that all 21 million bitcoins will be issued by 2140, although the exact date remains unknown.
The total number of bitcoins that will be available is limited to 21 million and not one more crypto. At the time of writing, there are approximately 19,665,000 BTC in circulation. However, new bitcoins are created approximately every ten minutes during the process of extracting new blocks.
These new bitcoins are then distributed to miners as a reward for their work in securing the blockchain.
Miners are essentially computers that solve complex mathematical problems to validate transactions on the blockchain. Only blockchains using the Proof-of-Work mechanism, such as bitcoin, allow mining.
This requires specialized machines and high electricity consumption, which results in significant costs. This is why miners are rewarded with bitcoins.
What is bitcoin halving used for?
Halving serves two main purposes:
- Restricting the supply of new bitcoins in circulation;
- Control BTC inflation and guarantee the sustainability of the blockchain.
As a new block is generally created every ten minutes, halving takes place on a four-year cycle. This is an automatic process written into the bitcoin source code, which means that miners’ rewards are automatically reduced when halving occurs, without requiring any external action.
Although the term “halving” is specific to Bitcoin, similar cryptocurrencies using Proof-of-Work (PoW) can also have mechanisms for reducing miners’ earnings. This is the case for LTC, FLUX, DASH and ETC, to name but a few.
These mechanisms differ from one cryptocurrency to another, with some, for example, providing for an annual reduction of only 10% in miners’ rewards.
As previously mentioned, the last Bitcoin is expected to be mined by around 2140, at which point the total number will reach its upper limit of 21 million Bitcoins, although the exact date remains uncertain.
In reality, the Bitcoin protocol was designed never to exceed this number. However, the extraction of the last Bitcoin will not mean the end of mining activity on the network, contrary to what one might think.
Miners should still be able to earn rewards from the transaction fees associated with validated transactions on the network.
Why a halving every four years?
Bitcoin halving occurs at regular intervals of 210,000 mined blocks. This corresponds to approximately every four years, since a new block is added to the blockchain about every ten minutes.
This halving of rewards is an automated process built into the cryptocurrency’s source code.
Halving is a highly publicized event that regularly fuels speculation about the price of Bitcoin and the launch of the bull run. It also enables miners to adapt progressively to evolutions and improvements in Bitcoin technology.
When did the previous halving of Bitcoin take place?
Since the very first block, the Genesis block, was mined on January 3, 2009, three halving events have occurred in the history of Bitcoin. Originally, each new block mined rewarded miners with 50 BTC.
- The first halving occurred on November 28, 2012, after 210,000 blocks had been mined, reducing miners’ reward to 25 BTC per block.
- The second halving occurred on July 9, 2016, after 420,000 blocks had been extracted. This second halving reduced the reward to 12.5 BTC per block.
- Finally, the third and most recent halving took place on May 11, 2020, after the extraction of 630,000 blocks, reducing the reward to 6.25 BTC per block.
The countdown to the next halving
The countdown to the next halving is on. Following the same pattern, the next halving is not expected until 2024. Although the exact date is still in doubt, the next halving is scheduled for around April 20, 2024.
Unlike previous halvings, a study conducted by Coinbase suggests that this time, the impact of the next halving may be limited. This conclusion is because the price of bitcoin has already risen considerably and is still affected by high key rates.
What impact will halving have on the network?
By definition, halving is a scheduled event that occurs roughly every four years, and it halves the reward miners receive for confirming transactions on the network. Bitcoin halving has always shaken up the crypto market.
The number of Bitcoins in circulation
In terms of quantity, halving translates firstly into a drastic reduction in the number of new BTCs put into circulation. This results from the halving of the reward given to miners for each new block mined. It also reduces the problem of inflation and the number of new BTC available.
In theory, this reduction in supply could stimulate demand for BTC, leading to an increase in its value on the market and encouraging miners to become more involved in the mining process.
Halving miners’ rewards
The miner who succeeds in finding the key to seal the block and create a new one receives an offer of cryptocurrencies. These rewards represent compensation for the effort made by the miner.
The hashprice corresponds to the average daily remuneration a miner receives for each terahash calculation (expressed in USD/TH/s per day).
The remuneration of these verification operators is made up of fees for transactions included in the block, as well as remuneration from the creation of new bitcoins.
These rewards are determined by an algorithm that sets the issue rate, which is impossible to change.
For the last four years, the reward per block created has been 6.25 BTC. Soon, this reward will be reduced to 3.125 BTC (equivalent to more than $206,000 at today’s bitcoin price).
Since the last halving on May 11, 2020, the bitcoin price has soared, reaching a record high of $72,797 in March, which should make up for the future shortfall for miners.
Impact on the hash rate
The hash rate is the speed at which bitcoin is mined. It is a measure of a computer’s mining power per second. Qualitatively speaking, halving can influence it. A high hashrate strengthens network security, but a decrease in hashrate can signal a reduction in blockchain security. However, a drop in hashrate can also make mining activity more accessible to new players, which in turn could stimulate an increase in the hash rate.
Impact on the BTC price
As for the impact on the BTC price, previous halving have shown an upward trend, but this largely depends on supply and demand as well as macroeconomic factors.
Although lower inflation is generally anticipated by the markets, ongoing economic events could dampen the positive impact on the Bitcoin price. It is therefore difficult to predict with certainty the immediate effect of halving on the BTC price.
Halving is a major event in the crypto world, especially for miners seeking to maximize their earnings. Although widely anticipated, its effects on the Bitcoin price remain subject to various variables, and it remains a crucial element in maintaining Bitcoin’s scarcity and value. Since Satoshi Nakamoto mined the very first block, the Genesis block, on January 3, 2009, three halving events have occurred in Bitcoin’s history. The latest halving took place on May 11, 2020, reducing the payout to 6.25 BTC per block. The next halving should take place towards the end of April 2024, bringing the reward down to 3.125 BTC. It remains to be seen whether this will affect the crypto price and future risks for BTC miners.
