What is Bitcoin Halving? All you need to know

The last Bitcoin Halving occurred on May 12, 2020.

The current price of Bitcoin is $64,500. The next Bitcoin Halving will occur on Apr 20, 2024. 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, the 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, and 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, the 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 the coronavirus crisis, the 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 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. The Bitcoin algorithm says that the number of bitcoins ever to be created is 21 million. And due to Bitcoin halving, the block reward halves every four years. These things are fixed. As central banks keep on printing money, the purchasing power of the currency decreases, which leads 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 numbers of bitcoins lead to scarcity. This kind of supply makes it a kind of incentive for those who acquired them first.

So far 19,687,500 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. A new block is created every ten minutes. Every day 144 new blocks and 7200 bitcoins are generated. So, a total of 10,500,000 bitcoins were created before the first halving. At today's price($64,500 per bitcoin) those rewards seem to be huge but those are the early adopters who built the chain and community.

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 took place in 2020 is the third bitcoin halving, which had cut the block reward from 12.5 to 6.25 BTC, which means only 900 bitcoins were generated each day instead of 1800 bitcoins. In the fourth Bitcoin Halving, which is going to take place on April 20, 2024, the block reward halves from 6.25 BTC to 3.125 BTC, which means only 450 new bitcoins are created every day.

64 bitcoin halvings are going to take place, before the generation of the last bitcoin. The last bitcoin is going to be created by the year 2140. This would be 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 a 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. After the third Bitcoin halving in 2020, Bitcoin reached an ATH price of $69,420 in November 2021.

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

However, many bitcoin and cryptocurrency exchanges have been 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 to a great extent from now. The crypto community is in high anticipation that history will repeat itself.

Bitcoin Halving: Impact on Miners

Miners are the sole reason for the creation of bitcoins and the functioning of the bitcoin network. Without miners verifying the Bitcoin transactions, they would be clogged up and no new blocks would be created. During the last Bitcoin Halving the block reward halved from 12.5 BTC to 6.25 BTC. This halving takes the block reward from 6.25 BTC to 3.125 BTC. Some miners are forced to leave mining in case it's not profitable for them after halving. In the 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 year.