Bitcoin is often called “digital gold”. Just like gold is a finite resource, so is Bitcoin because of its limited supply of 21 million coins.
Theoretically, once all the 21 million are mined, there will be no more new coins. Till now, more than 91% of BTC is already in circulation, and the remaining are expected to be created by 2140. The rate at which Bitcoin is released into the market is influenced by a process called “Bitcoin Halving,” which happens every four years.
What is Bitcoin halving?
Bitcoin halving is an event of cutting the mining reward by half, once every four years.
Halving is a crucial part of Bitcoin’s economic model. It ensures that new coins hit the market at a steady pace. Halving helps tackle inflation by maintaining scarcity. It is one of the critical differences between Bitcoin and traditional fiat currencies like US dollars. Fiat currencies typically have an unlimited supply and eventually lose value when central banks print too much of it.
How does it work?
Bitcoin’s proof-of-work (PoW) algorithm helps make these halving events possible. The PoW consensus mechanism requires that blockchain participants use computing power to solve complex puzzles.
These bitcoin miners trade their time and electricity with the intention of receiving bitcoin rewards. For each block that a miner solves, the miner receives a bitcoin reward as an encouragement to add more processing power to the Bitcoin network. Miners and investors can expect that these Bitcoin rewards will reduce by half roughly every four years.
Halvings also help gradually lower the Bitcoin in circulation before it hits its maximum supply of 21 million.
History of halving
The first ever halving happened in November 2012, and the most recent halving occurred in May 2020. Here’s a quick overview of the previous Bitcoin halvings:
- January 2009: Bitcoin launched with a block reward of 50 BTC per block.
- November 2012: First halving event cuts block reward to 25 BTC.
- July 2016: Second halving event reduces block reward to 12.5 BTC.
- May 2020: Third halving event reduces block reward to 6.25 BTC.
Consequences and effect on price?
Bitcoin halving is a major event, thereby having a significant effect on various parties involved in Bitcoin’s network.
Investor perspective: The halving event typically causes an increase in the price of the cryptocurrency due to the limited supply and rising demand. This is generally considered positive for investors. As the halving approaches, trading activity on the blockchain for the cryptocurrency tends to increase as investors anticipate the impact of the reduced supply.
Miner perspective: On the one hand, the reducing supply of bitcoins can boost demand and prices. However, the reduction in mining rewards can also make it challenging for small-scale miners or individual miners to remain viable within the Bitcoin ecosystem. This is because they may struggle to compete with well-established, large-scale mining operations.
When’s the next bitcoin halving?
As Bitcoin halvings tend to run in four-year cycles, the next Bitcoin halving should happen sometime in 2024. Experts suggest the Bitcoin reward will get slashed to 3.125 BTC in March 2024.
Remember that there’s no guarantee that a Bitcoin halving will dramatically impact its price. Previous market cycles are no indication of future price action. Ultimately, crypto prices are a function of supply and demand; therefore, even if Bitcoin’s supply reduces significantly, there must be enough buyers on the other end.