Bitcoin (BTC) Halving is the process where the rate and rewards for mining bitcoin are cut in half. The event happens every four years. Bitcoin founder Satoshi Nakamoto introduced the halving event to regulate the production of Bitcoin and keep the digital currency deflationary.
By limiting the rewards of miners, the halving event also effectively controls the frequency at which new BTCs are created, and ultimately Bitcoin’s inflation rate, making the asset more valuable.
To fully understand this concept, it is important first to have some background knowledge of mining.
Mining is a process that involves network validators who use powerful computers to solve complex mathematical problems on the network to verify transactions. A transaction is added as a new block to the blockchain after verification.
Bitcoin makes use of a Proof-of-Work (PoW) consensus mechanism to secure the network and prevent the system from being exploited.
The PoW mining protocol operates on the principle that the first person to solve a problem gets rewarded. However, this is no mean feat as these problems are always highly complex and often require specialised mining rigs to solve.
Nakamoto went with the PoW process largely to address the issue surrounding double-spending. The harder it is to solve a puzzle, the more difficult it is to suffer a 51% network attack.
A 51% attack occurs when only one entity controls more than 50% of the entire hash power of the network, making them powerful enough to block new transactions from taking place or being verified. This generally leads to a “double-spend.” A double-spend attack allows a malicious actor to fraudulently initiate multiple transactions using the same unit of a cryptocurrency.
Blocks on a blockchain contain the record of all the transactions that have taken place on that network. Thus, as the transactions on the network increase, more blocks are added to the blockchain.
A block on the Bitcoin network contains only 618.136 KiloBytes (KB) of the transaction history. As of the end of November 2021, there were over 436.25 Gigabytes (GB) worth of transactions history on the Bitcoin network. This figure rose from 4.52GB in December 2012.
Miners are often in a race against time because only the first validator to solve the mathematical puzzle and add the block of transactions to the network gets rewarded.
The miner gets rewarded with freshly minted Bitcoins as compensation for their effort used in validating a transaction.
Initially, the reward for adding a new block to the network was 50 BTC.
The first Bitcoin halving event reduced the miner’s compensation to 25 BTC. Four years later, it was reduced to 12.5 Bitcoin. As it stands, miners are rewarded with 6.25 Bitcoins whenever they add a block of transaction to the Bitcoin blockchain.
For some commentators, the halving event provides miners with lower incentives for undertaking intensive and energy-consuming tasks every four years. However, there is another angle to view the argument from.
As of 2009, 50 BTC was not worth much compared to what 1 BTC is worth today. Thus, the halving of miners’ rewards is justified, and in fact, a considerable encouragement for them.
For example, 6.25 BTC is worth over $340,000 when Bitcoin is trading around the $55,000 level. So we can confidently conclude that mining is much more lucrative and rewarding now than it ever was.
Bitcoin Halving and Inflation
With the example of 6.25 BTC worth over $340,000, that is a lot compared to what the digital asset was worth a couple of years earlier when the mining rewards were higher. This makes Bitcoin mining a worthwhile endeavour, despite the halving.
As the number of Bitcoin in circulation approaches its maximum supply, Bitcoin Halving naturally reduces the rate at which new coins are being added to the network.
Bitcoin mining difficulty is also set to play a crucial role in the success of the blockchain currency. Difficulty generally calculates the average block time needed to add new transactions to the network. A high difficulty parameter ensures that the network is secure against malicious attacks.
Bitcoin has the highest level of difficulty with the parameter set at 22.674 trillion. This makes Bitcoin highly secure and the parameter increases after each halving event. This way, newly minted Bitcoins would be introduced at a slower pace which warrants the 2140 target date that Bitcoin mining is expected to end.
This is a key attribute that explains why Bitcoin is described as a deflationary asset, especially as inflation fears continue to escalate.
When the total supply of Bitcoin has been fully mined, there would be a change to the miners’ reward. Instead of being paid BTC as compensation, they will only be paid a transaction fee for every new block added to the blockchain.
When Is The Next Bitcoin Halving?
Bitcoin halving (aka Halvening) takes place once 210,000 blocks have been added (this is estimated to happen every four years). The last Bitcoin halving took place on May 11, 2020.
Although there is no known official date yet, the next Bitcoin halving will likely occur sometime in 2024. Investors are already positioning themselves to benefit from this event in the future, due to the associated surge in the price of Bitcoin.
Historically, after every halving event, Bitcoin experiences a bull run. The first halving event occurred in November 2012 and Bitcoin rallied from $12 to $1,150 the following year. The second one in July 2016 saw the price of BTC shoot from $650 to almost $20,000 in 2017, an increase of 3,000%.
Since the last halving that occurred in May 2020, so far, the foremost digital currency has surged to an all-time high (ATH) of $69,044.77 in the last quarter of 2021.
These events, coupled with the amount of Bitcoin currently in circulation, have seen several institutional investors consider BTC as a hedge against recurring inflation. This becomes even more significant as a Bitcoin halving event draws close, as the price of BTC will likely surge due to supply crunch.
Bitcoin Halving Dates History
Historically, there has been an immediate surge in the price of BTC immediately after the Halving. The positive correlation between halving and BTC price spike has been continuous since the first halving occurred in November 2012. The price of BTC took a sharp upward movement from just $12 in 2012 to a massive $1,217 as of November 28, 2013, an astonishing gain of about 9,500% in just a year.
The next Bitcoin halving took place on July 9, 2016. At the time, BTC was worth $647, and by the end of the following year, it had attained an impressive height of $19,800. (Dec. 17, 2017, up about 3,000% in value.) After hitting this height, the price of BTC dipped to about $3,276 on Dec. 17, 2018.
On May 11, 2020, there was another Bitcoin halving. Before this, BTC stood at $8,787, but by April 14, 2021, BTC had touched new heights, soaring to $64,507, up 634% from the pre-halving value of the popular cryptocurrency.
Bitcoin halving will likely happen in 2024, as mentioned earlier, and based on historical data, the controversial cryptocurrency is expected to hit new record highs again.
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