What Is Bitcoin Halving
Bitcoin has no less than taken the world by storm in the past five years. Whether it’s its rebellion against the inflationary financial system that dominates the modern world, the novel blockchain technology underlying it with a plethora of practical use-cases, or simply the enjoyment of speculating on a volatile asset, Bitcoin has captivated the world.
Any prospective trader looking at this new asset should also have a good idea of how it works; how the mining helps provide the infrastructure to support a decentralized system and how halving instills its integrity as a deflationary asset. That’s why we’ve created this simple guide to understand one of the core concepts at the heart of the Bitcoin ecosystem: Bitcoin halving.
In this guide, we are going to look at what Bitcoin is, how it works, how halving is an interconnected part within this, and also why this is an important concept to understand in relation to the market value of the Bitcoin you hold.
What Is Bitcoin?
Bitcoin was created in 2009 shortly after the 2008 economic recession. The seismic events of 2008 had revealed a new concern for centralized financial systems and out of this grew the first truly decentralized peer-2-peer cash system: Bitcoin. This network was supposed to be able to simply send financial transactions and the value they hold to one another without the need for any centralized authority. The Bitcoin network would inherit its infrastructure from the community of miners that ran and verified its transaction, and get its security from cryptographic means.
It was this cryptography element that also interested some users to see Bitcoin as a store of value, as a comparable virtual gold. Today this is how we know Bitcoin; it now sets the bar and trends for the entire cryptocurrency market with a total market capitalization of over $840 trillion. Bitcoin also famously has no leader, instead, it is a mysterious figure known as Satoshi Nakomoto, a riddle yet to be solved by the community. You can find the Bitcoin white paper online written by Satoshi that sets out the core principle of how this technology works.
How Bitcoin Works
You can imagine the Bitcoin network as a big order book full of transactions, or a ledger. Users can send amounts of Bitcoin to other users on this ledger by using a specific address, just like with a traditional bank transaction. But where a bank transaction is sent to the centralized network of that bank to be verified Bitcoin is sent to the decentralized Bitcoin ledger. This is how funds are sent to users.
Miners are the next crucial part of this puzzle as they provide the physical infrastructure for this platform to be run on. Once they have verified the transactions and sorted them into blocks users know that the funds they are sending and receiving are secure, and this is what creates a functioning financial network. These miners then receive rewards for completing this process in BTC which results in more BTC being added to the overall supply.
Bitcoin is famous for being the antagonist of the modern-day inflationary financial system. It’s for this reason that it has inbuilt deflationary measures like halving to counteract the inflationary process of adding BTC to the supply through mining activities. Actually, for the complexity this system has it can be easily understood; but really the key to how these novel financial technology works are all in the process of mining and halving.
What Is Halving?
To understand what halving is we must first touch on mining. Mining is the process of contributing to the decentralized network that supports a protocol’s ecosystem and receiving financial rewards for doing so. People often don’t understand how a network can be decentralized, and offering rewards to miners for providing that physical infrastructure that a network need is exactly how it works.
Bitcoin uses a proof-of-work system that essentially means miners must solve complex mathematical equations to create a block. This block is then verified if solved, meaning it has become a verified part of the blockchain it supports and now further blocks can be built on top of it. Creating blocks is costly due to the computer power required, so miners receive rewards for doing so in the form of the native currency - in this case, BTC.
This process of mining is also how new coins are created. When a block is solved minor receive coins that are new to the overall supply, meaning it is an inflationary aspect of the ecosystem.
Halving is the deflationary element of the Bitcoin ecosystem. It is an inbuilt function within the network that means around every four years, or every 210,000 blocks mined, the rewards miners receive for mining blocks will be cut in half. Of course, this is not ideal for miners but in terms of tokenomics, it helps to reduce the supply of new coins. This essentially increases the value of those BTC that can be mined as now there are half as many available; this can also have a direct impact on the market price of the coin as speculators can see that there is no dilution of value. Essentially, it's a control of the supply.
Impacts on Miners
Miners are obviously very directly affected by this process. A dramatic 50% decrease in returns from mining activities will certainly be felt by those undertaking such activity. Miners must also find ways of working as efficiently as possible in this time to try to maximize their returns.
Impacts on Price
Historically, Bitcoin halvings have resulted in a dramatic increase in BTC valuation. Usually, this is around a hundredfold but many believe that also this is due to other contextual factors and not just down to the halving. It is not correct to say that a Bitcoin halving will result in an increase in BTC value.
Bitcoin Halving History
As of 2009 miners were rewarded a staggering 50 BTC for each block mined on the Bitcoin network. The first Bitcoin halving took place almost four years later in November 2012 which then saw this reward decrease by 50% to 25 BTC. This first halving saw a dramatic increase in BTC value, with it rising a hundredfold from $12 to $1,217. Theoretically, this is the effect a halving should have.
Second and Third Halvings
The next two halvings in 2016 and 2020 respectively went much the same way as the first. In 2016 the mining reward reduced again to 12.5 BTC and BTC value surged from around $600 to just under $20,000.
Similarly, for the halving in May 2020 BTC value sat at around $8,700; by April 2021 BTC had soared over 630% to an eye-watering $64,500. This 2020 halving saw the miners' reward halved again to 6.25 BTC.
The Future of Bitcoin Halvings
Currently, there is around 18.85 million Bitcoin left to be added to the overall supply. Eventually, around the year 2140, the final Bitcoin halving will take place and the total Bitcoin supply will reach its cap of 21,000,000. This marks a very interesting point for the ecosystem as miners will no longer receive their reward for the new BTC supply. At this point, the network will switch and begin to pay them in transaction fees paid by users.
Many financial commentators predict this could be a challenging moment for Bitcoin, with some suggesting it could even mark the beginning of a decrease in network confidence. Needless to say, at this point, it is only speculation - we will have to wait 120 years to find out.
Bitcoin halvings are no doubt one of the core reasons that this asset enjoys such extreme popularity. It provides the crucial deflationary element that makes this a rebel currency and also drives extreme market trends in terms of BTC value.
Overall, it can be said that these halvings reduce the rate at which new coins are created, thereby lowering the availability of new BTC supply and thus driving up demand and the resulting BTC market valuation.
However, it is important to know that this does not mean a Bitcoin halving guarantees an increase in BTC value. In fact, there are countless other contextual factors at play like the world economy, regulation, and hype that also could be the reason for these spikes in price. Therefore it is important to understand Bitcoin halving, but any market calculations made using this data should be made with extreme caution.