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The Bitcoin Halving: What, Why, and How?

04 August 2022

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The Bitcoin Halving: What, Why, and How?
 / A Refresher on Bitcoin Mining / What Happens at the Halving? / Why Does This Happen? / How Does the Halving Affect Price? / Key Takeaways: / 

Learn the basics of the Bitcoin halving. Find out what happens during a halving event and why it's such a big deal.

The Bitcoin halving is one of cryptocurrency's most anticipated and consequential events. Every 210,000 blocks mined—approximately every four years—the reward given to Bitcoin miners for their work is cut in half. Colloquially called "the halvening" or "the halving," this reward reduction directly affects the miners' earnings and the rate at which new Bitcoin enters circulation.

Why does this happen? Why reduce the rewards given to miners? And why is this such a big deal? Let's take a closer look.

A Refresher on Bitcoin Mining

To understand the halving, we need first to understand a little bit about Bitcoin mining (if you want an in-depth dive, go check out our intro to Bitcoin mining here).

Bitcoin miners are rewarded for verifying and committing transactions to the blockchain. Miners validate transactions through Proof of Work (POW), which bundles transactions into "blocks" and then solves a complex mathematical puzzle. To oversimplify, each block contains a group of transactions uniquely tethered to a mathematical puzzle. Every time a miner finds the solution to the mathematical puzzle, they "mine" the block, add the bundled transactions to the blockchain, and are rewarded with a certain amount of bitcoin.

This process of expending energy to validate transactions keeps the system running and lays the foundation for a decentralized, trustless network that doesn't require banks or other intermediaries to work.

In the early days of Bitcoin, mining rewards (called the block reward) were generous: 50 BTC per block. This was a hefty reward at the time, and many miners jumped in to claim it. And per the Bitcoin protocol, as more miners join the network and solve additional blocks, the difficulty of the POW mathematical puzzle adjusts to ensure that blocks are mined, on average, every ten minutes. The block reward remains constant as miners verify transactions—that is, until the halving.

What Happens at the Halving?

Remember, the halving happens every 210,000 blocks mined and cuts the block reward in half. If we look at history, the first Bitcoin halving occurred in 2012 when the block reward went from 50 BTC to 25 BTC. The second halving occurred in 2016, reducing the block reward to 12.5 BTC. The third and most recent halving took place in May 2020, halving the block reward further to 6.25 BTC.

bitcoin halving

The 64th and very last halving is expected sometime in the year 2140 and no new bitcoin will be minted from thereon after (there are a couple theories for what will happen then—check out our take here).

With each halving event, we can expect a few things to happen. For one, given that miners will earn half the bitcoin, the rate at which new Bitcoin is introduced into circulation will also halve. This indirectly affects the price of Bitcoin, which we'll touch on later.

Since halvings reduce miners' rewards, we expect some miners to drop off the network. Due to the expensive overhead of mining—the cost of ASIC chips, electricity, cooling, etc.—some miners may no longer find it profitable to stay in the game given the halved block reward.

However, other miners may view the halving as an opportunity. Historically, each Bitcoin halving has predated each Bitcoin bull run. So, if mining operations can withstand the halving event, they may be poised to profit handsomely in the months and years to come.

Why Does This Happen?

Short answer? That's just how the Bitcoin protocol is designed. It's in the code. But let's go a bit deeper.

Bitcoin was designed to have a finite supply of 21 million BTC. Once all 21 million have been mined, that's it—no more will ever be created. So, the halving is a mechanism to ensure that all 21 million bitcoins are predictably released into circulation with mathematical certainty.

The halving also serves as an inflationary hedge. Unlike traditional fiat currencies, which can be—and often are—printed at the whim of central banks, Bitcoin's supply is set in code and not subject to manipulative monetary policy. In other words, no one can "print" more Bitcoin. The halving is just one of many rules underpinning Bitcoin that helps keep its supply predictable, scarce, and deflationary. It also helps keep the Bitcoin protocol decentralized, trustless, and secure. Everyone, from miners to users, must agree to these underlying rules for the system to work.

How Does the Halving Affect Price?

As discussed, Bitcoin halvings have historically positively affected Bitcoin's price. But why? While there is no surefire answer, basic economics suggests that halvings positively affect the price of Bitcoin for a few reasons.

  1. Halvings reduce the rate at which new Bitcoin is introduced into circulation: As demand for Bitcoin increases (due to a combination of factors like increased adoption, institutional investment, etc.), there will be fewer bitcoins available to buy, all other conditions remaining the same. Economics 101 tells us that when demand increases and supply decreases, the price of a good or service will increase.
  2. Scarcity: There will only ever be 21 million bitcoins. As halvings reduce the rate at which new Bitcoin is introduced, it becomes increasingly scarce—and therefore, more valuable.
  3. Hype and speculation: Previous halvings have generated much hype and speculation surrounding Bitcoin's future price. This, in turn, has helped drive up the price. While halvings are positive for Bitcoin in the long run, they can also be disruptive in the short term. For example, the 2020 halving caused a great deal of uncertainty among miners. Some sold off their Bitcoin immediately after the halving, while others held onto their bitcoin, hoping that an eventual increase in Bitcoin price would offset the halved block reward.

Key Takeaways:

  • A Bitcoin halving is an event that occurs every 210,000 blocks mined—roughly every four years—where the block reward given to miners is halved.
  • The halving reduces the rate at which new Bitcoin is introduced into circulation and can positively affect price due to changes in supply, generally increased demand, and speculation.
  • The halving event can be disruptive to miners in the short term as decreased rewards cause some to sell off their Bitcoin to cover mining costs.
  • Others may view the halving as an opportunity, as halvings have historically preceded Bitcoin bull runs.
  • While there is no surefire way to predict how the halving will affect price in the short or long term, understanding what happens during a halving can help give insights into how the market may react.

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