What is bitcoin halving?

The available supply of conventional currencies rises and falls under the watchful eye of national central banks, but bitcoin’s overall supply is fixed and unchanging.

One of the most important features of bitcoin is the mechanism of limited supply and issuance. There are a total of 21 million bitcoins in the world, with just under 2 million left to create. Bitcoin’s protocol automatically reduces the number of new coins issued with each new block, in a process called halving or shrinking.

What is bitcoin halving?
Bitcoin halving is when the reward for mining bitcoin is halved. Halving occurs every four years.

The policy of halving was built into the bitcoin mining algorithm to counter inflation by maintaining a deficit. In theory, lower bitcoin issuance rates mean that the price will rise if demand stays the same.

Right now, bitcoin inflation is less than 2%, and it will decline with further reductions. That looks pretty good compared to the 9.1% annualized inflation in the June Consumer Price Index (CPI).

Bitcoin’s mining deficit determines its finiteness, and when rewards fall, supply is constrained. Increased demand at a time when supply is limited positively affects the price, which can make bitcoin attractive to investors.

How does Bitcoin Halving work?
A decentralized network of validators validates all bitcoin transactions in a process called mining. They are paid 6.25 BTC, which is currently about $148,000, when they are the first to use complex mathematical calculations to add a group of transactions to the bitcoin blockchain as part of the proof-of-work mechanism.

These transaction blocks are added about every 10 minutes, and, according to the bitcoin code, miners’ remuneration is cut in half after every 210,000 blocks are created. This happens about once every four years during periods that are often accompanied by increased volatility in BTC prices.

When did the first bitcoin halving occur?
The first bitcoin halving occurred in November 2012. The next price drop was in July 2016, and the last one was in May 2020.

The reward, or subsidy, for mining started at 50 BTC per block when Bitcoin was released in 2009. With each new halving, that amount is halved. For example, after the first halving, the bitcoin mining fee dropped to 25 BTC per block.

Chronology of bitcoin halving:

2009 Mining remuneration is 50 BTC per block.
2012 First halving. Remuneration decreases to 25 BTC.
2016 Second halving. Remuneration is reduced to 12.5 BTC.
2020 The third cut by half. The reward is reduced to 6.25 BTC.
2140 Here comes the 64th and last Halving.
There will be a total of 64 revaluations, the last of which will take place in 2140. At that point, there will be 21 million BTC in circulation and no more coins will be created. After that, miners will only be paid transaction fees.

Richard Baker, CEO of TAAL Distributed Information Technologies, a provider of mining and blockchain services, notes that miners may move transaction processing capacity from BTC after the next halving, as they will seek additional transaction fees elsewhere to make up for lost bitcoin revenue. Fewer miners will mean less network security.

If economic theory is correct, and historically for bitcoin it is, then bitcoin prices should rise sharply in response to supply demand. Although there is still debate as to whether the historical price movement around each halving was a direct result of halving. Higher prices will be an incentive for miners to keep processing bitcoin transactions.

When will the next bitcoin halving occur?
According to Bitcoin’s algorithm, halving occurs after a certain number of blocks are created. No one knows exactly when the next halving will happen, but experts give an estimated date of May 2024. That will be almost exactly four years after the previous one.

The somewhat predictable nature of bitcoin’s halving was designed to ensure that it wouldn’t be a major shock to the network, experts say. But that doesn’t mean there won’t be a stir around the next bitcoin decline. Historically, bitcoin price volatility has been seen before and after the halving. However, a few months afterwards, the bitcoin price tends to increase significantly.