Bitcoin Blockchain Halving
Basics of the Bitcoin blockchain
Bitcoin is a blockchain protocol and cryptocurrency and the world's first and biggest digital currency in terms of market capitalization. Its main objective is to eliminate the necessity for a central authority, such as banks, by decentralizing monetary control.
The original 2008 Bitcoin white paper that first described the blockchain system and its set of computational rules - that would serve as the backbone of the entire crypto market - was written by a person or group of people known as Satoshi Nakamoto. The Bitcoin protocol was officially released in 2009 as open-source software.
The blockchain is a decentralized and distributed ledger that records every transaction made on the network. The Bitcoin blockchain uses the Proof of Work consensus mechanism that requires members of a network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system. To incentivize the miners (think of them as validators) who verify and process new blocks, the network rewards them with new bitcoins. This reward is known as the block reward.
What is Bitcoin blockchain halving?
Bitcoin block rewards are cut in half after a certain number of blocks have been mined. This event is known as the Bitcoin halving or Bitcoin blockchain halving.
The halving occurs every 210,000 blocks, approximately every four years. This cuts in half the rate at which new bitcoins are released into circulation. By decreasing the rate at which new coins are issued over time, Bitcoin enforces synthetic price inflation, until the maximum supply of 21 million BTC is reached.
In August 2022, the number of bitcoins in circulation was about 19.1 million, leaving around 1.9 million left to be released via mining rewards until the maximum amount of bitcoin is reached. Unlike fiat currencies, bitcoin can't be printed infinitely.
In the past, these halvings have correlated with massive surges in the cryptocurrency's price. As with other assets with a finite supply, such as gold, high demand can lead to a price increase.
The Bitcoin Halvings
The first Bitcoin halving occurred on November 28th 2012, where bitcoin mining rewards went from 50 BTC to 25 BTC. Bitcoin price went from $12 to $1,207 in a year.
The second halving occurred on July 9th 2016, reducing the block reward to 12.5 BTC and increasing the cryptocurrency's price from $647 to $18,972 in under six months. A year and a half after the Bitcoin having, the bitcoin's price was 575% higher than its pre-halving price, reaching some (at the time) all-time highs.
The most recent halving took place on May 11th 2020. With this third halving, the reward was reduced to 6.25 BTC. On May 11th, a bitcoin's price was $8,821. On April 14, 2021, a bitcoin's price soared to $63,233.
The next Bitcoin halving is expected to occur in 2024, and the last halving is expected around 2140, when the total supply of Bitcoin will be out there.
So what happens when the maximum supply has been reached? All 21 million bitcoins that can ever be mined will have been extracted, marking the end of the halving schedule as there will be no further new bitcoins to uncover. It is anticipated that the value of transaction fees will increase over time, therefore still providing incentive for miners. This is primarily due to the expected growth in transaction volume that will come with attached fees, as well as the projected increase in nominal market value of bitcoins.
The impact of halving events
The halving event is a crucial part of Bitcoin's code and algorithm. Let's take a look at how Bitcoin halving can impact users, investors and miners.
Not only do halving events affect the total supply of bitcoin and the speed at which the cryptocurrency is issued, every halving has historically resulted in a bull run for Bitcoin.
Halving also affects the mining rewards for bitcoin miners, as shown above. The theory is that the halving sets off a chain reaction where the pace of Bitcoin issuance means that the price of Bitcoin will increase if demand remains the same. If a halving doesn't lead to an increase in demand and price, then miners wouldn't have any incentive to mine new BTC. This reduction in rewards combined to the price not increasing enough could potentially lead to a decrease in the number of miners and nodes on the Bitcoin network, which can impact the transaction fees and speed of Bitcoin transactions. Bitcoin has a system to prevent this: if the price doesn't go up, Bitcoin changes the difficulty it takes to get mining rewards, making it easier for miners and keeping them incentivized. This process of reducing difficulty of processing a transaction has proven successful.
Halving events also have a huge impact on the inflation rate of bitcoin. Before the first halving, the inflation rate was around 50%, and dropped to 25% after the halving. The most recent halving reduced the inflation rate to around 1.8%, making Bitcoin a scarce digital asset.
The reduced supply and surging demand is good news for investors: trading activity on the Bitcoin network increases in anticipation. Price increases and their pace differ based on logistics and conditions of each Bitcoin halving.
As of February 2023 with the discovery and launch of Bitcoin Ordinals, individual satoshis can be inscribed with arbitrary content, creating unique Bitcoin-native digital artifacts that can be held in Bitcoin wallets and transferred using Bitcoin transactions. With every Bitcoin blockchain halving, satoshi scarcity is cut in half, and so will be that of Ordinals.
Key takeaways
Halving events are critical to the supply and demand dynamics of the blockchain network and can significantly impact the price movements of cryptocurrencies. It should also be noted that other cryptocurrencies such as Ethereum also have halving events. Understanding the halving and its implications is crucial for anyone interested in mining Bitcoin, trading cryptocurrencies, or investing in digital assets such as BTC, NFTs, and ETFs.
And remember to keep an eye on the countdown!