Bitcoin Halving – What do you need to know?
Bitcoin halving is the most significant event for the Bitcoin blockchain. It is an important time because the protocol releases a new supply of coins to the market, but this time the supply is cut in half. The new coins are usually rewarded to miners for successfully validating blocks of transactions. Every halving event impacts the price of BTC.
Miners usually utilize high computing power equipment in order to participate in transaction validation.
What is Bitcoin Halving?
Bitcoin halving is the event when the supply of circulating Bitcoin is cut in half. The Bitcoin blockchain manages circulation by releasing BTC each block time as a reward to the best miner.
Unlike physical cash where the supply increases or decreases under the control of central banks, the total supply of Bitcoin is fixed at 21 million, and this amount is immutable.
The blockchain has already released 19 million Bitcoins and left nearly less than 2 million for mining. Usually, the Bitcoin protocol reduces the amount of reward/supply of new Bitcoins by half, after every 4 years. This process is automatic and referred to as Bitcoin Halving.
Bitcoins run on a decentralized, immutable, transparent and trusted public ledger. This makes the system a good tool for storing value, which is more similar to what both gold and fiat do. This time, however, is much different and with lots of certainties.
Satoshi Nakamoto, the creator of Bitcoin coded the halving policy into Bitcoin’s mining algorithm. The end goal was to protect the value of BTC from inflation by maintaining high scarcity.
Theoretically, halving Bitcoin issuance translates to having a stable demand for the sake of increasing the price of the coin.
The coin’s present inflation rate is less than 2%. This rate will decrease with more halving events and it’s relatively better, compared to Fiat’s annualized inflation rate of 9.1%.
How Does Bitcoin Halving Work?
Bitcoin relies on a decentralized web of validators to validate BTC transactions. The process of validating transactions on the Bitcoin Network is called mining.
This mining process involves solving a complex arithmetic problem in order to add a block of transactions to the blockchain.
Successfully solving the problem arms the miner with proof of work, which unlocks the next block of transactions on the protocol. The successful miner per each block gets paid 6.25 BTC. With Bitcoin’s high price, this is a decent amount for the miners to keep validating new transactions and have the network run without friction.
Before the previous halving event that occurred in May 2020, the reward for mining a block was 12.5 BTC.
The blockchain takes approximately 10 minutes to add one block of transactions. Bitcoin’s algorithm dictated that the reward for mining a block would be decreased by half once 210,000 blocks have been validated. This number of blocks takes approximately 4 years and often causes lots of price volatility across the overall cryptocurrency market.
Meanwhile, the reward mechanism will take place until the year 2140. This is the time when miners will attain the proposed cap of 21 million bitcoins. So what happens to transaction validation after this point? Validators will continue validating transactions but will get rewarded with user fees. Such fees will ensure that miners do their work and the network continues running.
The halving event is so significant in the story of Bitcoin because it marks a significant drop in the rate of miner rewards.
When the Bitcoin blockchain first came out, the reward for mining one block of transactions was 50 BTC. The first halving event took and the amount fell to 25, then 12.5 and now 6.25.
Each halving event reduces the rate of supply of new coins, therefore lowering the availability of BTC, and hence increasing demand. This event sort of impacts investors since other assets with infinite supply could have high demand and push the prices upwards, for example, Gold.
Previous Bitcoin halving events have correlated with soaring bitcoin prices. For instance, the very first halving event on Nov.28 2012 increased the price of Bitcoin from $12 to $1,207. On Dec.17 2017, the second halving event increased the price from only $647 to $18,972. 2018’s bear market however caused the price to dramatically drop to a bottom of $3,716. A massive downward correction of nearly 575%.
May 2020 event is the most recent Bitcoin halving event that occurred with BTC trading at $8,821. A year later in April 2021, the price of the leading coin surged to an all-time high of $63,233.
Bitcoin’s halving chain reaction
The following is a chain of reactions that occurs whenever there is a Bitcoin halving:
Halving the miner reward→ halving the inflation →Lowering the available supply of BTC→ Increases demand → Increasing price →Miners still get their reward, despite the smaller BTC amount, the value of Bitcoin improves in the process.
If Satoshi Nakamoto had never pre-built the halving event on Bitcoin’s Protocol, there would be no increased demand and hence increasing price; therefore there would be no miner incentive. The reward for mining would be meagre, and the value of BTC would never rise.
Bitcoin prevents the chances of miners getting no or few rewards by reducing the mining difficulty.
Mining difficulty is how hard it is for validators to verify a block of transactions and add that block to the blockchain. The bitcoin protocol updates the mining difficulty after miners have created 2,016 blocks.
There are chances of demand not increasing when the reward has been halved, The only way to ensure miners get adequate rewards is by reducing the mining difficulty. Therefore, the computation resources needed to create a block are minimal, and hence a reduction in costs.
However, every halving event is surrounded by high speculation, volatility and hype. Hence, fully understanding the market’s reaction to the event is highly unpredictable.
The recent halving in 2020, occurred during the worldwide Covid-19 pandemic. This could be the reason it took at least 1-year to correct upwards. The period was also mired in high regulatory attention, increased institutional interest in cryptocurrencies and a lot of celebrity hype. Given all these factors, determining the aftermath of May 2020 halving is increasingly unpredictable.
How the Bitcoin Halving Event Affects Miners and Investors
In this section, we will explain the implication of Bitcoin halving on major blockchain stakeholders, particularly investors and miners.
Investors – The halving event is good news to investors because of the increase in the price of Bitcoin. Remember, Bitcoin has a direct impact on the majority of cryptocurrencies that trade in sync. Besides, trading activity and volumes heighten whenever we near the halving event. Nonetheless, the pace of price fluctuations is highly dependent on other conditions and global events taking place at that particular time.
Miners – Miners receive a mix of implications whenever a halving event takes place. This is why the impact is somewhat said to be complicated. Think of this. A reduced supply of bitcoins causes an increase in the demand for the cryptocurrency, and hence an increase in price. However, fewer rewards can easily eliminate individual miners and small mining firms from the ecosystem, Primarily because they cannot survive operating on high costs in order to supply adequate computing resources to continue mining profitably. Therefore, this is the reason why each post-halving event results in a reduction in the number of miners. This has a negative implication for decentralization and security of the network as well. There is a high chance of a 51% attack on the Bitcoin Network after the halving since most miners have already left the network.
Other Coins that Halve Like Bitcoin
There are other coins that halve depending on their mechanism for validating transactions and consensus. The list is extensive but we are going to look at a few in detail:
- Litecoin: MIT graduate Charlie Lee built Litecoin in 2011. Litecoin’s blockchain has a halving process that’s similar to Bitcoin. Lee likes to refer to the coin as silver to Bitcoin’s gold. Litecoin generates new coins into the supply by rewarding miners for validating blocks of transactions. Unlike bitcoin’s 10-minute block time, Litecoin takes 2.5 minutes to add new blocks to the blockchain. Litecoin halves its miner rewards after creating 840,000 new blocks. This takes approximately 4 years. The total supply of Litecoins that will ever exist caps at 84,000,000 LTC.
- Litecoin’s initial reward at its launch was 50 LTC per successful block. After only 2 halving events, the reward is currently at 12.5 litecoins. It will require miners over 33 halving events to deplete all miner rewards and bring the total LTC into circulation.
- Bitcoin Cash (BCH): Bitcoin Cash is the main hard fork of the Bitcoin blockchain. The main purpose of this hardfork was to increase bitcoin’s block size and accommodate more transactions. The fork took place in Aug 2017. There is no big difference between the halving event for Bitcoin and Bitcoin Cash. Each block takes 10 minutes, and each halving event occurs after mining 210,000 blocks. However, unlike the majority of the halving coins, BCH began with an initial miner reward of 12.5 BCH. The maximum supply of BCH is 21 million and is likely to be depleted by 2140.
- Zcash (ZEC): Zcash is a privacy coin, more so like Monero and Dash. However, the coin is also a hard fork of the Bitcoin network. Launched in Oct 2016, Zcash aims to strengthen privacy and security for users. The ZEC blockchain validates transactions without the need for validating information such as amount, receiver identifications and amount. Each halving event for Zcash takes place after 4 years. The maximum supply of ZEC to ever exist is 21 million.
Bitcoin Halving FAQ (Frequently Asked Questions)
Why does Bitcoin halving occur less than the coded 4 years?
Bitcoin’s mining algorithm finds new blocks and adds them every 10 minutes. If more miners join the blockchain; they bring in more hash power and hence reduce the time it takes to add a group of transactions. This is why bitcoin adjusts the mining difficulty after every 2,016 successful blocks. 2,016 blocks take approximately 2 weeks. The aim is to restore the 10-minute target. Despite the exponential and consistent growth of the bitcoin network, the block time has remained at roughly 10 minutes.
When did all halvings occurr?
All of Bitcoin’s halving events have not yet occurred. The first took place in Nov. 28 2012 after miners had brought over 10,500,000 BTC into circulation. The second halving event took place on July 9, 2016, and the most recent one on May 11, 2020. Bitcoin’s next halving event will take place in 2024.
Do Halving events affect the price of Bitcoin?
Halving affects the price of Bitcoin. This is because each halving doubles the cost of operating a bitcoin mining firm. Think of the miners as the producers of BTC. If the production cost increases, the cost of the commodity (in our case BTC) will automatically increase. Hence, the miners usually adjust their selling price to favour the cost of production. Interestingly, the price of BTC tends to rise in anticipation of any halving event. Usually, several months before the event takes place.
What will happen when there are no more Bitcoins to be mined?
The last of the 21 million maximum supply of bitcoins will be mined in 2140. The halving schedule will stop because there will be no more mineable coins. On the other hand, miners will earn from transaction fees paid by users. The role of the miners will be to validate transactions and secure the blockchain network.