What is Bitcoin Halving?

The next Bitcoin Halving is going to take place on May 12, 2020. What is it? What actually halves? Is it the price of Bitcoin? Let's find out.

Contents
✔What is meant by Bitcoin halving?
✔What is its impact on the price of bitcoin?
✔What happened during previous halvings and what is expected now?
Here's everything you need to know.

What is Bitcoin Halving?

Bitcoin is created by a process known as bitcoin mining. Miners solve difficult cryptographic puzzles using high computational power which consumes a lot of electricity. By solving those puzzles, they create new blocks in the bitcoin blockchain. A new block is created approximately every 10 minutes. For every block they add to the blockchain, they are rewarded with a block reward. Block reward is the only way, new bitcoins are created.
For every 210,000 blocks created i.e., approximately every four years, block reward gets halved. This is known as Bitcoin Halving or Bitcoin Halvening.

Bitcoin's Tokenomics

Tokenomics combines 'Token' and 'Economics'. For fiat currencies like US Dollar, Euros, Rupees, supply and interest rates are controlled by the central banks of the country. A Monetary policy is how an authority manages the money supply. In the USA, Federal Reserve takes care of the supply of USD. Federal Reserve can pump in or remove dollars from the circulation at its will. Recently, due to coronavirus crisis, FED would likely inject more than 6 trillion dollars into the economy. This is what they call Quantitative Easing. Every central bank does this during the times of crisis to improve the liquidity in the economy.

But, Bitcoin's monetary policy is a written code or algorithm. It is practically impossible to change the algorithm as it would require an immense amount of computational power. Bitcoin algorithm says that the number of bitcoins ever to be created is 21 million. And due to bitcoin halving, block reward halves every four years. These things are fixed. As central banks keep on printing the money, the purchasing power of the currency decreases, which would lead to inflation. But in the case of bitcoin, this cannot happen and bitcoin halving ensures that the purchasing power of bitcoin increases over time. These predetermined number of bitcoins lead to scarcity. This kind of supply makes it a kind of incentive for those who acquired them first.

Till now 18,359,012 bitcoins have been mined. It doesn't mean the same number of bitcoins are generated daily. Let's see why?

When the first block or the Genesis block was mined on Jan 03, 2009, by the creator Satoshi Nakamoto, the block reward was 50 BTC. As a new block is created every ten minutes, every day 144 new blocks and 7200 bitcoins are generated with a total of 10,500,000 bitcoins were created before the first halving. At today's price($8500 per bitcoin) those rewards seem to be huge but those are the early adopters that built the chain.

At the time, Satoshi couldn't have known what percentage would use the new digital money.

The first halving that took place on November 28, 2012, cut the block reward to 25 BTC, which led to the creation of only 3600 bitcoins daily. The halving that's going to take place in 2020 is the third bitcoin halving, cuts the block reward from 12.5 to 6.25 BTC, means only 900 bitcoins are generated each day instead of 1800 bitcoins. 64 bitcoin halvings are going to take place, before the creation of the last bitcoin. The last bitcoin is going to be created by the year 2140. This would the last block that would carry a block reward. After that, even though new blocks are created, there will be no block rewards for miners but only fee rewards.

Bitcoin Halving: Impact on Bitcoin's price

During the first halving, there was not much awareness about bitcoin halving and what to expect. The price of bitcoin during the first bitcoin halving on Nov 28, 2012, was $11 and exactly one year after the halving, that was Nov 28, 2013 bitcoin was trading at $1040 which is almost 100x gain in a year.
And however the price plunged back to $500, by the second halving on July 09, 2016, bitcoin was trading at $650 and a similar bullish pattern was formed after the halving, taking its price to $2500 in the following year. And everyone knows what happened next in December of the year 2017. Bitcoin price hit an all-time high price of $20,000.

Source: Coin Metrics

The theory is that if the miners have less bitcoin to sell, then with the constant demand or apparently increasing demand for bitcoin, with the decrease in supply could lead to increase in the price of bitcoin according to the basic economics.

However, many bitcoin and cryptocurrency exchanges are established till now and high trading volumes have been reported with a lot of people buying and selling bitcoin. Financial institutions are going to be involved in a great extent from now. Crypto community are in high anticipation that history would repeat itself.

Bitcoin Halving: Impact on Miners

Miners are the sole reason for the creation of bitcoins and functioning of the bitcoin network. Without miners verifying the bitcoin transactions, they would be clogged up and no new blocks will be created. This halving takes the block reward from 12.5 BTC to 6.25 BTC. Some miners are forced to leave mining in case it's not profitable for them after halving. In long term, block reward also goes to zero by 2140. In that case, a large number of transactions of large amounts should be happening on the bitcoin network. This would help them in earning transaction fees as fee rewards. As of now, we never know what happens after 100 years.

Click here to check the average fee rewards over the last one year.