Bitcoin, or digital gold, is a deflationary asset with a maximum supply capped at 21 million coins. It being deflationary means that its supply is designed to decrease over time. As a result of this model, Bitcoin experiences halving, an event that occurs every four years.
Miners, investors, and traders need to understand halving because of how it impacts pricing and mining profitability. For example, halving reduces Bitcoin miners’ rewards for verifying transactions by half. However, there is more.
Keep reading this article as we examine everything you need to know about Bitcoin halving. We will explore how the process works, how it impacts the network, and some common misconceptions about the concept. Let’s dive right in!
KEY TAKEAWAYS:
- Bitcoin halving is an event where Bitcoin’s block reward is reduced by half, and it happens every four years.
- It happens to ensure Bitcoin’s supply remains scarce, thus increasing its price as demand increases.
- So far, halving has happened in 2012, 2016, 2020, and 2024.
- Due to Bitcoin’s dominance in the crypto market, its halving is often followed by a bull run.
What Is Bitcoin Halving?
Bitcoin halving refers to the event where the rewards miners receive for validating and adding blocks to the Bitcoin network are cut in half. Initially, they received 50 BTC per block. However, after every 210,000 blocks (which roughly amounts to four years), the reward is halved. Today, after four halvings, the current reward for mining this crypto is 3.125 BTC per block.
How Bitcoin Mining Works
Bitcoin mining is the process through which new blocks are added, and transactions are validated on the Bitcoin network. This happens through a consensus mechanism known as proof-of-work. Here, miners compete to solve a mathematical puzzle. The first person to solve it adds the new block to the existing chain of blocks to earn Bitcoin.
Miners or validators are important because they ensure the integrity and security of a blockchain. However, Bitcoin mining is energy-intensive. As such, the rewards are given to encourage validators to keep securing the network.
Why Bitcoin Halving Happens
Halving exists to ensure that the supply of Bitcoin remains scarce. Unlike fiat currency that can be printed without limits, Bitcoin’s supply cannot exceed 21 million. Thus, its price is bound to increase in value over time as the demand increases and supply decreases.
The logic is to replicate the difficulty associated with the extraction of scarce commodities like gold. By reducing block rewards by half every four years, there is less risk for inflation. As rewards decrease, so does the number of new Bitcoins in circulation. Ultimately, the increased scarcity drives up Bitcoin’s demand and price.
As of May 2024, only 1.3 million BTC are available as mining rewards. This means that there are currently about 19.7 million coins in circulation.
The History of Bitcoin Halvings
Since the cryptocurrency was launched in 2009, there have been four halving events. Bull runs and increased interest in the crypto market have characterized every Bitcoin halving. Let’s briefly examine them and the impact they had on the market.
- First Halving (2012): This happened on November 28, 2012, and it reduced the block reward from 50 BTC to 25 BTC. Before halving, Bitcoin equaled about $12. After the event, it soared to over $1,000.
- Second Halving (2016): The second halving was on July 9, 2016, and the reward was cut to 12.5 BTC. After the halving (around the end of 2017), this asset reached an all-time high of about $20,000.
- Third Halving (2020): On May 11, 2020, the Bitcoin block reward became 6.25 BTC. Despite the COVID-19 pandemic, the crypto surged to $60,000 in 2021.
- Fourth Halving (2024): Bitcoin’s last halving was on April 19, 2024, with a block reward of 3.125 BTC. It was worth over $60,000 at that time. All things being equal, there are 33 halvings to come, and the last one should happen in 2140.
Impact of Bitcoin Halving
Bitcoin halving generally has a ripple effect on different players and across many circumstances. For miners, the decreased rewards can make them reconsider the profitability of mining, especially if they have inadequate resources. For traders, the expectation of a halving event often leads to them buying the coin massively ahead of time in the hope of a price increase.
In the broader crypto market, halving typically leads to price surges in altcoins. This is because of how the events boost investors’ confidence in the ecosystem. Bitcoin’s dominance generally affects market sentiment, which often results in a bullish runs after it has halved.
Common Misconceptions About Bitcoin Halving
If you are hearing about Bitcoin halving for the first time, then you must be aware of some common misconceptions that could potentially mislead you. Check them out below:
- Bitcoin’s price doubles immediately after the halving: Historical data show a significant price increase after halving. However, these price surges are not always immediate. It often takes months for the full effect of halving to be seen in the market.
- Halving guarantees long-term gains: The crypto market is generally volatile. This fact also applies to Bitcoin halving. While major price gains followed previous halvings, this might not always be the case moving forward.
Finally
Bitcoin halving is one event that the crypto world looks forward to because of how it impacts the space. While it was designed to ensure long-term appreciation of Bitcoin’s price, it has its challenges. Miners, investors, and every crypto enthusiast need to stay informed about Bitcoin halving so they know how to get the best out of the volatile market.