In a simple term, Bitcoin halving is a process that halves the number of new Bitcoins that can be created. However, to understand how the halving process works, it is important to first understand how the Bitcoin network operates.
New Bitcoins are generated via Bitcoin mining. Mining is the process in which Bitcoin transactions are validated by a group of nodes (miners) that forms the Bitcoin network. After validation, each validated Bitcoin transaction is added to the Bitcoin Blockchain.
For validating Bitcoin transactions, miners are rewarded with new Bitcoins. This acts as an incentive for miners to continue as nodes for validating Bitcoin transactions. Currently, there are more than 11,000 nodes (miners) on the Bitcoin network validating Bitcoin transactions. Anyone can join the Bitcoin network as a miner, as long as he or she has sufficient storage to store the entire Bitcoin Blockchain and its history of transactions.
Bitcoin has a finite number – 21 million coins. That means once 21 million Bitcoins have been created, the Bitcoin network would no longer be able to generate new Bitcoin. Presently, about 18 million Bitcoins have been mined – that’s about 86% of the total Bitcoin supply.
As stated above, new Bitcoins are generated during the validation of Bitcoin transactions by miners. However, to prevent an occurrence whereby all Bitcoins in supply should be generated within a short time by miners, the concept of Bitcoin halving was integrated into the Bitcoin Blockchain right from the very beginning.
The Bitcoin halving concept holds that after every four years (or after every 210,000 blocks have been added to the Bitcoin Blockchain), the number of new Bitcoin generated is halved – this is referred to as Bitcoin halving – and generating new Bitcoins becomes more difficult.
In 2009, when Bitcoin was launched, nodes (miners) were rewarded with 50 Bitcoins per block for validating Bitcoin transactions. After 210,000 blocks were added to the Blockchain (generating 10,500,000 Bitcoins), the first halving took place in November 2012, and miners received 25 Bitcoins for each block added to the Blockchain.
On 6th July 2016, the reward was halved to 12.5 Bitcoins per block after 420,000 blocks had been produced, and on 11th May 2020, the reward was halved again to 6.25 Bitcoins per block. So presently, miners on the Bitcoin network will have to share the reward of 6.25 Bitcoin per block – something that was eight times as much at inception.
Although the actual month cannot be ascertained, the next Bitcoin having should take place in 2024 when mining reward would be halved to 3.125 – on the average, a new block is generated on the Bitcoin network every ten minutes.
It is projected that the last Bitcoin halving should take place in the year 2140 when the last Bitcoin would be mined. And when this happens, no more Bitcoin would be generated and miners would stop receiving block rewards. Instead, their revenue will come from transaction fees paid on Bitcoin transactions.
Bitcoin halving makes Bitcoin mining challenging over time. It reduces the rate at which new Bitcoins are created and thus lowers the available supply of Bitcoin, preventing inflation – too many Bitcoins in circulation.
Bitcoin halving has a significant implication for investors as a low supply of Bitcoin, like other valuable assets, can trigger a high demand for Bitcoin and cause its price to soar. Hence, Bitcoin halving has a direct influence on the rise in Bitcoin’s price.
For instance, when the first halving took place in 2012, Bitcoin witnessed an increase in price from about $11 to almost $1,200. When the next Bitcoin halving took place in 2016, the price of Bitcoin, which had dropped to $650, rose to almost $20,000. However, Bitcoin plunge in value over a year from this all-time height down to slightly above $3,000. Nevertheless, this new price is still about 400 percent higher than Bitcoin’s pre-halving price.
The effect or implication of Bitcoin halving on the Bitcoin industry looks somehow like this sequence:
When Bitcoin halving takes place → the available supply of Bitcoin is lowered → and the current Bitcoin’s inflation rate is halved → this leads to an increase in the demand for Bitcoin → which subsequently causes an increase in the price of Bitcoin.
Although miners’ reward is also halved or lowered in the process, the value of the reward is slightly unaffected as Bitcoin increases in price in the process as well.
However, in the case where Bitcoin halving does not trigger an increase in the demand for Bitcoin and an increase in price (which is a rare occurrence), then the value of the reward received by miners for validating Bitcoin transactions would be smaller and this may dissuade them for continuing as nodes.
To prevent this and give miners incentive for validating Bitcoin transactions, the Bitcoin system has a process of changing the level of difficulty it takes to validate Bitcoin transactions and get mining rewards – there would be a reduction in the difficulty level of Bitcoin mining to keep miners incentivized. Therefore, the number of Bitcoin generated as a reward as well as its value is still low but the difficulty level of Bitcoin mining or transaction validation is reduced.
Nevertheless, as the reward received becomes less significant, some smaller miners, whose mining rigs barely cover production costs, may be forced to leave the network or perhaps, upgrade their mining gadgets. But who knows whether better and more efficient ways of mining Bitcoin would emerge that would enable smaller miners to remain in the network.
So far, Bitcoin halving has recorded proven successes twice. There was an appreciable increase in Bitcoin price following every Bitcoin halving – though, a significant drop in price follows after. Nevertheless, as stated above, the “latter price” following the significant drop in price after halving remains higher than each pre-halving price.
While Bitcoin halving has worked so far, it is undeniable that the process is associated with immense volatility, hype, and speculation. Hence, it is unpredictable as to how the general cryptocurrency market will react to the recent Bitcoin halving and subsequent halvings in the future.
However, if history repeats itself, Bitcoin should begin to witness a significant increase in price from August 2020. Demand for Bitcoin should increase as more crypto traders might start purchasing Bitcoin due to FOMO, thus stimulating an increase in the price of Bitcoin.