“Bitcoin halving” refers to an event that happens every four years when the block rewards for Bitcoin miners get cut in half. This reduces the supply of new bitcoins by 50%.
The crypto halving process was built into the Bitcoin protocol to ensure that Bitcoin would be a good store of value by remaining a deflationary currency. Read on to learn more about halving, why it matters, and its effect on Bitcoin’s value.
Table of Contents
- What Is Bitcoin Halving?
- How Does Bitcoin Halving Work?
- Bitcoin Mining 101
- When Does Bitcoin Halving Occur?
- Why Does Bitcoin Halving Happen?
- Who Chose the Bitcoin Distribution Schedule?
- Is Bitcoin Halving a Good or Bad Thing?
- Does Halving Bitcoin Have Any Effect on Its Price?
What Is Bitcoin Halving?
Bitcoin halving — also referred to as “the halving,” in some instances — is a periodic event where the number of new Bitcoins that enter circulation due to crypto mining is reduced by half.
Bitcoin halving occurs once every four years, and as time goes on, the potential rewards for mining become less and less — while, in theory, helping to maintain Bitcoin as a store of value.
For example, miners could mine as many as 50 Bitcoins every ten minutes when Bitcoin was first introduced. But after several halvings, rewards have been reduced to 6.25 Bitcoins. Other cryptocurrencies may use other methods for maintaining value, including coin burning.
How Does Bitcoin Halving Work?
Halving Bitcoins is, as mentioned, built into the Bitcoin blockchain network’s protocol. It is, in a sense, a system feature or a critical component of how Bitcoin works.
By decreasing mining rewards every four years, the network made it more enticing for early adopters to start mining early. Since the rewards were relatively high early after Bitcoin hit the market, more miners were likely interested in getting involved. But as the rewards are reduced with time, more miners compete for those rewards.
This adds more hashing power to the network and ensures that the market isn’t flooded with Bitcoin all at once.
Bitcoin Mining 101
To better understand halving, it may help to have a basic understanding of crypto mining — the process by which new Bitcoins are created. The Bitcoin network functions in a way that requires no centralized planning or authority. People can send value to each other peer-to-peer for a small cost.
On the network, “mining” facilitates transactions. Bitcoin “miners” are computers that process transactions for the network. They verify that transactions are valid and keep the network secure. In exchange, miners receive new Bitcoins as they are created as rewards.
Bitcoin transactions form groups known as “blocks.” Each block gets attached to all the previous blocks, forming what’s known as a blockchain. A new block is created once every ten minutes, and miners compete to “find” the next block and earn its rewards, with the miners who put in the most work rewarded with new coins.
Miners can also team up and participate in mining pools, which means miners pool their resources to earn rewards.
The most recent halving occurred in 2020, which set the reward for finding the next block as 6.25 Bitcoins. This won’t change until the next halving, sometime in 2024. This is significantly critical if you’re actively investing in Bitcoin, as it could have market repercussions.
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When Does Bitcoin Halving Occur?
Bitcoin halving happens approximately once every four years. The first halving occurred in 2012 when the block reward was reduced to 25 BTC per block from the original 50 BTC per block. Subsequent halvings dropped the reward from 25 BTC to 12.5 BTC and then to 6.25 BTC. The next halving will set the reward at 3.125 BTC.
By constantly reducing the supply of new currency, the theory is that Bitcoin will remain a deflationary
Why Does Bitcoin Halving Happen?
Again, the logic behind halving is that it allows the system to have a set schedule for introducing new BTC into the market and a set limit for new coins (as well as the total 21 million overall Bitcoin limit). By sticking to a rigid schedule, Bitcoin can avoid an overabundance problem and retain value.
Given that no regulatory body can change that schedule, politics or economic pressure do not affect the overall amount of BTC in circulation — something that differs when discussing fiat currencies.
Who Chose the Bitcoin Distribution Schedule?
To retain its value, a new currency must have a limited supply and be challenging to create. Bitcoin’s creator, Satoshi Nakamoto – whose identity remains a mystery — decided to halve Bitcoin’s block reward every four years, according to the project’s original whitepaper.
Halvings have occurred in the following years, with the block rewards being reduced as follows:
• 2012: 25 Bitcoins
• 2016: 12.5 Bitcoins
• 2020: 6.25 Bitcoins
When is Bitcoin halving next? As mentioned, the next halving will occur in 2024, when the block reward will be reduced to 3.125 Bitcoins.
Is Bitcoin Halving a Good or Bad Thing?
Bitcoin halving has its upsides. It has been said that halving is one of the reasons Bitcoin still has value.
When Bitcoin was created, it was the advent of a form of currency that was profoundly deflationary and had a fixed supply limit (only 21 million bitcoins will ever exist).
Some say that Bitcoin is the “hardest” money ever known, meaning that Bitcoin is hard to create and has a limited supply. In this sense, Bitcoin is sometimes compared to gold or other precious metals.
Gold also has to be mined and has a scarce supply. This is why Bitcoin is sometimes referred to as “digital gold,” but Bitcoin is not correlated with the price or supply of gold, nor is it considered a precious metal. There is, however, a crypto on the market called “Bitcoin Gold,” which is not the same as actual, out-of-the-ground gold.
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Does Halving Bitcoin Have Any Effect on Its Price?
Historically, the price of Bitcoin has increased in the 18 months following a halving. After the first halving occurred in 2012, Bitcoin hit a record high (for the time) of more than $1,000 in November 2013. Before the halving in April of that year, Bitcoin was trading at less than $50.
The second halving occurred in 2016. In December 2017, Bitcoin prices hit a record high of nearly $20,000, up from less than $1,000 in January. And since the halving in 2020, Bitcoin prices have increased to more than $60,000 — though they have fallen significantly since then.
After the price increase, there is often a retreat, sometimes resulting in drawdowns as large as 90%. The price then begins appreciating slowly, leading up to the next halving, and the cycle tends to repeat. This is an oversimplified version of events but offers a general sense of how halving Bitcoin has historically impacted prices.
That said, past performance does not always indicate future results. Plus, markets move for various reasons, from geopolitical and macroeconomic events. Cryptocurrencies can sometimes be correlated with broader financial markets, so it’s hard to pinpoint whether halving was the exact cause of any price increase.
The Takeaway
Bitcoin halving refers to an event when the amount of Bitcoins miners receives in exchange for processing transactions is cut in half, occurring once every four years. The most recent halving was in 2020; the next one will happen in 2024.
Halving is a fundamental part of Bitcoin’s network, and as a feature of that network, it is what makes some people believe that Bitcoin is unique as a store of value. But the halving can and does affect its price, too, which is something investors should keep in mind.
