Bitcoin halving occurs every four years on average and is associated with a significant increase in the price of Bitcoin. Bitcoin halving is an event that reduces the rewards provided to Bitcoin miners and has a profound effect on the demand and scarcity of Bitcoin. This article will explore the basics of how Bitcoin works and then explain what Bitcoin halving is and why it has historically had a positive impact on the price of Bitcoin.
The basics of the Bitcoin blockchain
Bitcoin operates on a network of decentralized computers working together to keep the Bitcoin network secure and up to date. Each computer in this network is referred to as a “node”. These nodes each maintain a copy of the ledger that lists all Bitcoin transactions and wallet balances.
Anyone can download the software required to run a node and assist in the maintenance of the Bitcoin blockchain, as long as the hardware they use meets the minimum requirements. There are roughly 10,000 nodes currently maintaining the Bitcoin blockchain, which becomes more secure as more nodes join.
To help explain the structure of the Bitcoin network, let’s use a comparison to a traditional bank. When you deposit money in a traditional bank account or send money from one bank account to another, the bank will update a ledger, which keeps track of all account balances and transactions. In this example, the bank is a centralized institution — nobody but the bank has access to the ledger. Clients of the bank must trust that the bank keeps accurate ledger records.
Bitcoin, however, operates with a distributed ledger. Every node in the Bitcoin network holds a copy of the Bitcoin ledger, which is updated with new transactions and account balances on a regular basis. When a Bitcoin user sends a Bitcoin transaction, the transaction is added to the Bitcoin distributed ledger, verified, and then committed to the Bitcoin blockchain. (In some cases, high-frequency transactions are sent to the Lightning Network before being included on the main blockchain.) The Bitcoin network participants, known as miners, are responsible for verifying these transactions and adding them to the blockchain.
Bitcoin uses a decentralized network of 10,000+ computers around the world to maintain a distributed ledger of transactions and wallet balances. The Bitcoin blockchain operates in a way that does not require a third-party intermediary, like a bank, in order to process transactions.
What do Bitcoin miners do?
Miners collect transactions and secure them in “blocks,” which are added to a progressive chain of historical blocks, hence the term “blockchain”. How does the Bitcoin network make sure that miners are doing the right thing, though — and what’s in it for the miners?
Bitcoin uses a system called Proof of Work (PoW) to gain consensus on the current state of the Bitcoin ledger and to keep the Bitcoin ledger secure. This essentially means that miners must prove that they have made the effort in processing transactions.
Within a PoW blockchain, miners use dedicated hardware to solve extremely complex equations in order to verify blocks of transactions. The verified transaction data stored within these blocks are immutable, meaning it is unable to be changed.
This process is extremely energy-intensive and requires a lot of computing power. This means that mining can have high electricity costs. Should a miner attempt to add a fraudulent block to the blockchain, their block would be rejected.
In return for their work in securing the Bitcoin blockchain and committing blocks, miners receive a block reward for every block they add to the chain as well as transaction fees for the transactions they process.
The Bitcoin block reward and Bitcoin halving
Satoshi Nakamoto originally designed Bitcoin with a maximum supply of 21 million Bitcoin — no more will ever exist beyond this number. The design of the Bitcoin blockchain operates in a manner that ensures Bitcoins are made available at a consistent pace.
Every 210,000 blocks, the block reward is cut in half. When the Bitcoin network first launched, the block reward was set at 50 BTC. On November 28th, 2012, the Bitcoin network reached its first 210,000 block milestone, resulting in the miner’s reward halving to 25 Bitcoin.
Another halving occurred in 2016, resulting in the block reward dropping to 12.5 Bitcoin. The most recent halving occurred in May 2020 and saw the reward drop to 6.25. A Bitcoin halving event takes place roughly every four years, so the next halving is expected to occur in 2024.
The Bitcoin halving serves an important function — the amount of Bitcoin that can be mined with each individual block decreases, increasing the scarcity and value of Bitcoin. The halving ensures that Bitcoin is a deflationary currency, rather than an inflationary currency.
At the time of writing, over 19 million Bitcoins have been mined, which is almost equal to 90 percent of all 21 million Bitcoin. By 2039, the block reward for mining Bitcoin will fall to just 0.19531250 BTC.
How does Bitcoin halving affect Bitcoin’s price?
The most obvious impact of a Bitcoin halving is the effect it has on the price of Bitcoin. Historical price data reveals significant surges in Bitcoin prices subsequent to a halving. The first Bitcoin halving in 2012 saw Bitcoin’s price surge from $12 USD to $1,214 over the following year. The second halving that took place in 2016 saw Bitcoin prices increase from $647 to $19,800 over the following year and a half.
The third halving on May 11, 2020, which is the most recent halving, occurred when the price of Bitcoin was $8,787 USD. By April 2021, the price of Bitcoin had increased to $64,507 USD. Clearly, Bitcoin halving events are associated with significant increases in the price of Bitcoin.
By diminishing miner rewards, the halving potentially reduces the total revenue that Bitcoin miners gain from solving blocks. Halving does indeed cut the rewards provided to miners, however, it reduces inflation and available Bitcoin supply, thereby increasing demand and price.
What will happen when every Bitcoin has been mined?
It is estimated that around the year 2140, all 21 million Bitcoins in existence will have been mined. Following that, the halving schedule will stop as there will be no more new Bitcoins to mine. However, transaction fees paid to miners are expected to increase in the future, thus miners will still be incentivised to continue validating transactions on the blockchain. The reason for this is that transaction volume is expected to significantly increase by this time.
Bitcoin halving, which occurs roughly every four years, halves the amount of Bitcoin rewarded to miners. This increases the scarcity of and demand for Bitcoin, which has historically had an overwhelmingly positive effect on the price of Bitcoin.
When a Bitcoin block is successfully committed to the Bitcoin blockchain, the miner responsible receives block rewards in the form of freshly minted Bitcoin. The Bitcoin halving performs a deflationary function and ensures that the supply of Bitcoin is stable. Halving is a key function of the Bitcoin blockchain that separates it from inflationary currencies and, as a secondary effect, increases scarcity, driving Bitcoin price increases.
This article has discussed the basics of the Bitcoin blockchain and explained what Bitcoin halving is and how it affects the price of Bitcoin. If you would like to learn more about Bitcoin mining, blockchain, and other topics there are plenty of great resources on Swyftx Learn!