What Is Bitcoin Halving? How It Works, Why Does It Matters?

What Is Bitcoin Halving? How It Works, Why Does It Matter? If you are holding any coins and don’t know a way forward, read this article.

Bitcoin Halving refers to a significant event in the Bitcoin network where the reward for mining new bitcoins is cut in half.

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This event happens approximately every four years and is a part of the design of the Bitcoin blockchain, which aims to decrease the rate at which new bitcoins are introduced into circulation over time.

Initially, when Bitcoin was first created, the mining reward was set at 50 bitcoins per block. However, every four years, or after approximately 210,000 blocks are mined, this reward is halved. The purpose behind this mechanism is to ensure that the total supply of bitcoins remains finite, with a maximum limit of 21 million bitcoins.

The previous Bitcoin Halving events occurred on November 28, 2012, reducing the reward to 25 bitcoins per block, and then on July 9, 2016, reducing it further to 12.5 bitcoins per block. The most recent halving occurred on May 11, 2020, reducing the reward to 6.25 bitcoins per block.

The upcoming halving is expected to take place in April 2024, during which the block reward will be reduced to 3.125 bitcoins per block.

As of March 2024, approximately 19.65 million bitcoins have been mined, leaving around 1.35 million bitcoins to be released through mining rewards in the future.

What to Know about Bitcoin Network

At its core, Bitcoin operates on a technology called blockchain, which is essentially a decentralized network of computers known as nodes. These nodes run Bitcoin’s software and maintain a record of all transactions that have ever occurred on the network. Each node stores the entire transaction history, ensuring transparency and security.

When a Bitcoin transaction occurs, it must be validated by the network to ensure its legitimacy. This validation process involves verifying various parameters of the transaction, such as its authenticity and compliance with network rules. Once verified, the transaction is added to a block, which is then appended to the existing blockchain and distributed to all nodes in the network.

While anyone can participate in the Bitcoin network as a node, not all nodes are involved in the process of mining.

What to Know about Bitcoin Mining

Bitcoin mining involves using specialized computers or hardware to validate transactions and add them to the blockchain. Miners are rewarded for their efforts with newly minted bitcoins and transaction fees.

Mining in the Bitcoin network relies on a mechanism called proof-of-work (PoW), which requires miners to solve complex cryptographic puzzles to validate transactions. This process consumes significant computational power and energy, serving as proof of the work done by miners.

When a block of transactions is ready to be added to the blockchain, miners compete to be the first to solve the cryptographic puzzle associated with the block. The first miner to successfully solve the puzzle gets to add the block to the blockchain and receives a reward in the form of newly minted bitcoins.

This process of validating transactions and adding them to the blockchain is what creates the chain of blocks, forming the blockchain. The Bitcoin network uses this decentralized and secure system to ensure the integrity and reliability of transactions across the network.

Effects of Bitcoin Halving

Inflation

Halving the Bitcoin reward aims to tackle inflation concerns. Inflation refers to the decrease in purchasing power of a currency over time. In the U.S., it’s measured by the cost of a basket of goods. While a 2% inflation rate is generally seen as healthy, it’s often a target set by central banks rather than a fixed figure.

The Bitcoin Halving aims to counter inflation by reducing the reward amount and maintaining scarcity. However, this mechanism doesn’t shield Bitcoin users from inflation effects in the fiat currencies they convert Bitcoin into for everyday use.

Demand

Following a halving, the reduced supply of new Bitcoins typically leads to increased demand. Historical trends show that Bitcoin’s price has generally risen after each halving event.

Investing

Originally designed as a payment method, Bitcoin gained popularity among investors due to its potential for gains. Investors view halving as a reduction in new coin supply, potentially leading to increased investment value. However, Bitcoin investing is speculative, as investors hope for price appreciation.

Mining

Miners, who validate transactions and earn rewards, have historically profited from Bitcoin mining. However, halving reduces mining rewards, impacting profitability. Large mining firms invest in infrastructure and capacity to remain competitive, anticipating halving effects. Smaller miners may face challenges, as reduced rewards affect profitability.

Consumers

For consumers using Bitcoin for purchases or remittances, halving may affect the value of their holdings or transactions. Price fluctuations post-halving determine the purchasing power of Bitcoin for everyday use.

What Happens When Bitcoin Halves?

The term “halving” in Bitcoin refers to the reduction in the number of tokens rewarded, simulating diminishing returns and aiming to boost demand.

Why Are the Halvings Occurring Less Than Every 4 Years?

Bitcoin’s mining algorithm targets finding new blocks roughly every 10 minutes. Variations in block mining time can shorten or lengthen the time to reach the next halving goal. For instance, if blocks consistently take about 9.66 minutes to mine, it would take approximately 1,409 days to mine the required 210,000 blocks for a halving.

What Happens When There Are No More Bitcoins Left?

It’s projected that by 2140, the last Bitcoin will be mined. With halving occurring every 210,000 blocks, the reward diminishes until one satoshi is the reward, making the total circulating supply equal to 21 million Bitcoins. A satoshi is the smallest Bitcoin denomination and cannot be halved.

The Bottom Line

Bitcoin halving slashes the rate of new Bitcoin issuance by half. This reward system is expected to continue until 2140, reaching the proposed 21 million Bitcoin limit.

In 2009, each mined block initially rewarded 50 bitcoins. Subsequent halvings reduced it to 25, then 12.5, and further to 6.25 bitcoins per block as of May 11, 2020. Another halving is anticipated in April 2024.

Bitcoin halving profoundly impacts its network. For miners, it may lead to consolidation as smaller miners exit the ecosystem or are absorbed by larger players.