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What is Bitcoin Halving and Why Does it Matter? (2022 Guide)

Knowledge Crunch | Friday, February 11, 2022 3:47 PM GMT

Bitcoin halving (The halvening) refers to an event when the pace at which new units of the world's largest cryptocurrency enter circulation is cut in half. 

It's part of an overall strategy to keep the maximum supply of bitcoins fixed, in contrast with fiat currencies like the US dollar, which have essentially unlimited supplies and lose value when governments print too much of it. Unlike other altcoins such as Ethereum, this event is exclusive to Bitcoin. So here we delve into the details to answer - What is Bitcoin halving and why does it matter?

 

 

Table of Contents

 

What is Bitcoin Halving?

5 Bitcoin Halving Effects

6 Reasons Why Bitcoin Halving Matters

Frequently Asked Questions (FAQs)

 

 

 

What is Bitcoin Halving?

The creator of Bitcoin—Satoshi Nakamoto (a pseudonym used by him or her) set an artificial limit on the number of Bitcoin that could ever be produced. The halving occurs every four years, slowing the rate at which new tokens are created. Some argue it leads to Bitcoin price gains, a topic of much debate.

Bitcoin halving is when the pace of new BTC creation is cut in half, which happens every 210,000 blocks mined, or about every four years until all 21 million total number of bitcoins are completely mined.

That limit is 21 million Bitcoin and the last halving will hit around the year 2140.  At that point, miners will no longer be rewarded in Bitcoin for their efforts. 

The reason for this is that the supply of Bitcoin is one of the most important factors determining the price of the cryptocurrency, along with the demand for Bitcoin.

 

How does Bitcoin halving work?

As part of Bitcoin's coin issuance, miners are rewarded a certain amount of bitcoins whenever a block is produced (approximately every 10 minutes). 

When Bitcoin first started, 50 Bitcoins per block were given as a reward to miners. A "block" on the Bitcoin blockchain is a file storing 1 MB worth of Bitcoin transaction records.

"Miners" compete to add the next block using specialized hardware to solve a hard mathematical problem, producing a random 64-character output called a "hash," completing the task and locking the block so it can't be changed. Miners earn bitcoins by completing these blocks.

When the cryptocurrency was first released, miners would earn 50 bitcoins (BTC) per block. In this way, early adopters could be incentivized to mine the network, even before it was clear what a success it would be.

After every 210,000 blocks are mined (approximately every 4 years), the mining reward halves and will keep on halving until the block reward per block becomes 0 (approximately by the year 2140). 

As of now, the block reward is 6.25 coins per block and will decrease to 3.125 coins per block post halving.

Before we head on to the next section you may want to take a look at our crypto terms refresher guide: 28 Crypto Terms to Know Before You Invest in Crypto (2022 List).

 

5 Bitcoin Halving Effects

Source: Pixabay

Although Satoshi Nakamoto never fully explained his reasoning for capping the supply of Bitcoins at twenty-one million units, some speculate that it’s merely a product of starting with a block subsidy of 50 BTC, which is halved every 210,000 blocks.

Rationally, the incentive for mining bitcoin would fall with the completion of each halving. However, bitcoin halvings are associated with huge surges in the price of bitcoin, which provides miners with the incentive to mine more, although their rewards are now halved.

In contrast to fiat currency, it loses purchasing power over time as new units enter into circulation, with central banks and governments alike controlling the monetary policy. Having a finite supply means that Bitcoin is not prone to debasement in the long run. 

Had the halving mechanism not been created by Satoshi, all of Bitcoin would be mined by 2016. The halving mechanism provides an incentive to mine for the next hundred years. Here we discuss the 5 effects of each halving on Bitcoin as a whole.

If you’d like to read more about Bitcoin, we’ve written a guide about it here: What Is Bitcoin & How Does It Work? The Beginner's Guide for 2022.

 

1. Price of Bitcoin

An interesting price pattern has been observed during “Halving Cycles.” In the past, both leading up to and immediately following halving events, Bitcoin price has experienced a bull run. 

These bull runs have been followed by crashes. The crashes have been followed by long “crypto winters” where sentiment is at its lowest and major news networks suddenly lose interest in Bitcoin. Until the next halving cycle starts the process again.

Want to know more about Bitcoin’s history? We’ve written a post about bitcoin’s hard fork to Bitcoin Cash here: Bitcoin vs Bitcoin Cash: 5 Differences Investors Should Know.

 

2. Inflation rate

Halving brings down bitcoin’s inflation rate. The core infrastructure of bitcoin is built for it to be a deflationary digital asset.

Halving plays a pivotal role to ensure this for example: In 2011, the inflation rate of bitcoin was 50% but after the first halving in 2012, it dropped to 12%, and the second halving in 2016, it went to 4-5%. Finally, in the third halving, the current inflation rate went down to 1.76%. This means the value of bitcoin goes up after every halving.

Historically, after every halving, bitcoin experiences a bull run. As supply decreases spurring the demand, the price surges. However, this uptrend is not immediate. 

After evaluating the past three halvings and the surges that followed, As an average estimate, the spike usually happens after three to six months and not instantaneously.

 

3. Scarcity

Scarcity lies at the heart of Bitcoin. There will only ever be 21 million Bitcoins mined. The bulk of the supply has already been created (~18.7 million), with the remainder to be mined until the year 2140.

The process of mining involves packaging 1 megabyte’s worth of transactions into a block and collecting the transaction fee; an associated “block reward” is unlocked with every new block. 

Block rewards are how new Bitcoins are mined. Blocks are created every 10 minutes, and this will continue as long as the miners are willing to process transactions to earn transaction fees and block rewards.

On November 28, 2012, the block reward was cut to 25 BTC per block. On July 9, 2016, the block reward was cut in half again to 12.5 BTC per block. 

Finally, on May 11, 2020, the latest halving of the block reward occurred. The current block reward is 6.25 BTC per block. The next halving will occur sometime in the spring of 2024 when the block reward will be reduced to 3.125.

 If you want to know more about blockchains, we’ve written a guide about them here: What is a Blockchain? Everything Beginners Need to Know.

 

4. Good or bad for miners?

Right now, transaction fees are worth much less than the value of the block reward at around 0.6 bitcoins, or $5,000, per block. So the halving of the block reward means that a miners' income would fall almost half overnight.

That sudden decline in the rewards for mining means that the mining is suddenly a lot less profitable. Barring a big increase in bitcoin's price, it’s expected that bitcoin miners temporarily stop investing in new mining hardware for the next few months. 

If bitcoin mining becomes unprofitable enough, some miners might even switch off less efficient mining hardware because it's not generating enough bitcoins to cover operating costs.

A happy side effect for everyone else: the bitcoin network's energy consumption is likely to fall in the next halving as lower profits from bitcoin mining force miners to tighten their belts. Simply put… Lower miner revenues would mean lower energy consumption for mining.

 

5. The hash rate

To comprehend this, we must first discuss the hash rate. For Bitcoin mining, the hash rate is defined as the number of SHA256 computing operations executed per second. 

This value rises as the number of miners increases, implying that the network is faster and more secure. 

If many miners decide to depart simultaneously, the network may experience a bottleneck for a moment as users migrate to more rapid chains, making it more straightforward for fraudulent users to take over vast chunks of the network.

However, historical evidence suggests that halving events do not cause this reaction. When the first halving occurred in 2012, Bitcoin's hash rate dropped somewhat from December 2012 to mid-February 2013. 

Following that, both hash rate and mining profitability increased. This means that, once the dust settles, halving is advantageous to both miners and the network as a whole.

A similar scenario occurred during Bitcoin's second halving, but the beneficial impacts took longer to manifest. 

The hash rate continued to rise steadily, but mining profitability did not recover for nearly a year after the halving date. If this pattern continues for the following event, mining profitability may suffer a long-term decline.

 

6 Reasons Why Bitcoin Halving Matters

Source: Pixabay

Bitcoin halving is considered by crypto enthusiasts to be a good thing. It has been said that halving is one of the reasons Bitcoin has been such a huge success and is such a revolutionary technological development.

For the first time, a form of money has been created that is profoundly deflationary, has a fixed supply limit (only 21 million bitcoins will ever exist), and can only be produced by investing electricity and computing power.

Compared to national fiat currencies that have an unlimited supply and can be created out of thin air, Bitcoin is incredibly scarce.

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 similar to gold. Gold also has to be mined and has a scarce supply. This is why Bitcoin is sometimes referred to as  “digital gold”.  

Want to know why Bitcoin is traded so much? Read what we’ve written here: How to Trade Cryptocurrency: Beginner's Guide (& Examples).

 

Reason #1: Halving affects Bitcoin’s value

To answer this question, it could be helpful to look at previous halvings. So far, there have been three since bitcoin’s inception in 2009. Historically, the Bitcoin price has increased dramatically in the 18 months following the halving. 

It seems that, some experts have said that Bitcoin tends to rise rapidly at some point after the halving. Then there’s a crash, sometimes resulting in drawdowns as large as 90%. 

After stagnating for some time, the price then begins appreciating slowly leading up to the next halving, and the cycle repeats. This is an oversimplified version of events but it offers a general sense of how halving bitcoin has impacted prices historically.

That said, past performance does not always indicate future results. Plus, markets move for a variety of reasons from geopolitical issues and macroeconomic events. 

Cryptocurrencies can at times be correlated with broader financial markets, so it’s hard to pinpoint whether halving was the exact cause of any price increase.

 

Reason #2: Halving helps maintain Bitcoin’s protocol

Even though Bitcoin is digital money, it can’t be created endlessly. Verifiable scarcity is core to its value proposition. Foundational to the Bitcoin protocol are two concepts relating to scarcity. 

First, there will only ever be 21 million bitcoin. (As of late 2020 less than 2.5 million bitcoins were remaining to be virtually mined).

Second, the amount of new bitcoin added to the network will be reduced by half every four years. This second concept is referred to as the halving. 

A halving event is coded into a blockchain protocol from the launch of its genesis block, provided that the network is proof-of-work-based. 

Fundamentally, this recurring event is specified in only two lines of code, one of which states when a halving happens, while the other specifies when the blockchain involved should stop halving, which for Bitcoin is after 64 times. 

 

Reason #3: Increased Bitcoin prices (due to halving) are an opportunity for crypto investors and traders to profit

Bitcoin ascended from about $11 USD to above $1,000 USD in 2013 after the 2012 halving event, then crashed down to a few hundred dollars. 

It was after the halving date in 2016 and during the 2017 run-up that Bitcoin hit $20,000 USD in pricing and garnered significantly more attention than it had before.

Although the immediate impact on the price of bitcoin was small, the market did eventually respond over the course of the year following the second halving. 

Some argue that the increase was a delayed result of the halving. The theory is that when the supply of bitcoin declines, the demand for bitcoin will stay the same, pushing the price up. 

Looking at bitcoin’s price 365 days after the second halving, we can see it rose by 284% to $2,506.

Looking at the most recent halving, we can also see bitcoin’s price continued to perform bullishly a full year after the event took place. This time, it rose by more than 559%.

 

Reason #4: Halving affects Bitcoin’s inflation rate

When Satoshi Nakamoto invented Bitcoin, the creator designed the protocol to be an inflationary currency, one that is predictable as bitcoin’s inflation always decreases every four years.

BTC’s inflation rate is around 3.6% and it’s expected to drop to 1.8% after the halving event. The cryptocurrency’s inflation rate will be lower than the average inflation target central banks reference worldwide at 2%. 

Unlike central banks, no one person or centralized entity can make adjustments to BTC’s monetary inflation rate. Meaning there is more control for the average investor and user with what they do with their Bitcoin.

Uses of Bitcoin can vary but written the benefits of those in our article here: The 20 Benefits of Cryptocurrency You Need to Know (in 2022).

 

Reason #5:  Mining process 

New units of Bitcoin are created through mining, which is the process of confirming the digital currency's transactions and combining them into blocks. To verify these transactions, miners must leverage specific hardware and consume substantial amounts of electricity. To make it worthwhile, they must receive some kind of reward.

Every time a block is completed, the miner (or the larger mining pool) responsible for creating that block receives a mining incentive in the form of bitcoin and also a transaction fee.

Initially, the mining reward was 50 BTC. However, the amount has decreased twice in both 2012 and 2016.

 

Reason #6: The end game

Bitcoin was designed with a few safeguards created specifically to keep inflation under control. The cap on the total supply (set at 21 million) and the series of halvings were both created to help ensure that Bitcoin's purchasing power would not diminish.

Investors should keep in mind that every time a halving takes place, the mining reward is reduced by 50%, which in turn causes the rate at which new Bitcoins are added to the total supply to fall by half.

As for how these developments affect price, investors can look to prior market history around these events to get a better sense.

So how does Bitcoin fare to other altcoins like Ethereum? We’ve written a guide about that too: Ethereum vs Bitcoin: 6 Differences Crypto Investors Must Know.

 

Now Over to You

Bitcoin halving is a much-hyped event that has been happening at approximately four-year intervals, with the first one occurring in 2012. It's part of the programming underlying the virtual currency to keep its total supply fixed.

As an investor, it's important to be aware of Bitcoin halvings, as they've historically caused significant fluctuations in the price. The next halving is expected in 2024.

We hope you enjoyed this edition of the knowledge crunch blog just as much as we enjoy writing them! Stay tuned for more and be sure to check out our other helpful blogs with advice and tips to reach your investment goals with ZuluTrade. 

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Disclaimer: The views expressed do not constitute investment or any other advice/recommendation/suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in this article do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade. Every metric and the statistical number is a result of a past performance which does not constitute a promise or a certainty for a future one.

Frequently Asked Questions (FAQs)

Q1. What date is Bitcoin halving?

Every four years. The next is expected to occur in early 2024.

 

Q2. When did the last Bitcoin halving happen?

At the time of writing, the latest and third halving took place in May 2020.

 

Q3. Does Bitcoin halving affect the Bitcoin price?

Since halving the block reward effectively doubles the cost to miners, who are essentially the producers of bitcoins, it should have a positive impact on price since producers will need to adjust their selling price to their costs.

 

Q4. When did past Bitcoin halving events happen?

The first Bitcoin halving occurred on Nov. 28, 2012, after a total of 10,500,000 BTC had been mined. The next occurred on July 9, 2016, and the latest was on May 11, 2020. 

 

Q5. Who controls the Bitcoin halving events?

Satoshi Nakamoto, Creator of Bitcoin programmed the block reward to be cut in half at regular intervals.

 

Q6. Does Bitcoin halving mean generating more Bitcoins?

No, it just induces inflation in Bitcoin’s price by reducing the number of bitcoin in circulation and increasing demand for Bitcoin.

 

Q7. Are there any Bitcoin halving implications?

Yes, Halvings reduce the rate at which new coins are created and thus lower the available amount of new supply, even as demand increases. This has some implications for investors as other assets with a low or finite supply, like gold, can have high demand and push prices higher.

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