Since its creation and adoption as a digital asset, the Bitcoin halving has been one of the most significant events in the bitcoin ecosystem. As it is part of the effort to limit bitcoin's maximum supply.
Bitcoin is based on a blockchain, which is a distributed digital ledger. The blockchain comprises blocks that record information about transactions, previous blocks, addresses, and the code that executes transactions and manages the network. However, to form a new block, the network will go through mining –discovering new blocks, confirming transactions, and adding them to the bitcoin network. The algorithms generate new bitcoin and distribute it to computer users who complete pre-specified mathematical challenges.
To handle transactions, bitcoin employs the Proof-of-Work consensus mechanism. As a result, users can qualify as bitcoin miners by dedicating their computing power and resources to the blockchain through the PoW consensus technique. Miners on the bitcoin network mine new coins and receive a block reward for their effort –the time and resources required to run computer hardware and solve challenging mathematical challenges. When a specific amount of transactions is performed, the data is combined and uploaded to the blockchain as a new block. Each blockchain block contains about 1 MB of transaction data. Once a block is created, it cannot be changed or reversed.
Miners receive a specific number of bitcoins as their mining reward for adding each block. Since miners are rewarded with fresh bitcoins every time they add a block, the total number of bitcoins in circulation increases.
However, because of the finite amount of bitcoin created –21 million–the process of block halving occurs to prompt price inflation by limiting the number of bitcoin in circulation and increasing demand for bitcoin.
What is Bitcoin Halving?
A block halving is a process that reduces the creation of new bitcoin units. It refers explicitly to the regular halving events and minimizes the block rewards granted to miners. As a result, the block reward provided to bitcoin miners for processing transactions is cut in half every time 210,000 blocks have been mined, or roughly every four years until all the 21 million bitcoin created are in circulation.
Historically, the last three halvings occurred in 2012, 2016, and 2020. The mining reward was 50 BTC when the blockchain first became operational in 2008. The prize stayed unchanged until 210,000 blocks were mined. The first Bitcoin halving occurred in 2012 when the reward for mining a block was cut from 50 to 25 bitcoin. Mining 210,000 blocks take about four years, and the halving will continue until the 21 million bitcoin in creation is achieved.
Similarly, the halving event occurred when another 210,000 blocks were mined entirely in 2016. The reward for each block produced was reduced to 12.5 bitcoin. In 2020, the cycle was repeated, but the reward was reduced to 6.25 bitcoin.
Why does Bitcoin Halving Occur?
Because Bitcoin is a decentralized asset and not controlled by a single person or group, there must be specific regulations for how many bitcoins are created and released. This means the monetary structure of bitcoin is fixed and practically impossible to change because of the total supply and the halving event embedded in the bitcoin code.
The bitcoin mining algorithm scans for new blocks and adds them to the chain every ten minutes. With more miners joining the network and contributing to the hashing power, the time it takes to find blocks will decrease. The complexity level of mining computations is reset every two weeks. Resetting the difficulty level helps keep mining times consistent despite the growing number of miners. As a result, the mining time per block has remained constant at less than 9.5 minutes despite tremendous growth in the last ten years.
Because of the halvings results and no more bitcoin will be mined after the 21 million limits are reached, this results in lower mining rewards, and the scarcity of bitcoin in circulation grows over time. As a result, each coin becomes increasingly valuable as there are higher demands.
How Bitcoin Halving Affects Its Price
Miners lose 50% of their transaction processing incentives with each halving. Nonetheless, each halving slows the rate at which new bitcoins are created, increasing the coin's scarcity. As a result, the price of bitcoin rises. However, the price of bitcoin is influenced by several other factors and the halving.
Bitcoin increased from $12 to $1,150 in a year after the first bitcoin was halved in November 2012. Similarly, the price of bitcoin was around $660 at the time of the halving in June 2016; after the halving, bitcoin traded horizontally until the end of the month, before falling to as low as $533 in August. However, after the crash, bitcoin's price soared to an all-time high of more than $20,000 before the end of the year. Also, following the 2020 halving, bitcoin's price rose from just over $9,000 to more than $27,000 by the end of the year.
In general, bitcoin tends to grow significantly after the halving. Then there's a crash, resulting in up to 90% declines. After a period of decline, the price begins to gradually increase in anticipation of the next halving, and the cycle continues.
Next Bitcoin Halving
The increase in bitcoin supply will drop as halvings continue until all 21 million BTC have been mined; with expert projections, the final fractions of bitcoin will be mined in 2140. This will be the 64th and final halving, and no new bitcoins will be created. Hence, the next halving is expected in 2024.
Final Takeaway
The purpose of halving is to ensure bitcoin scarcity. The quantity of bitcoins in circulation on the network is limited because no central authority controls its supply. Also, bitcoin halvings are essential for traders since they reduce the number of new bitcoins created by the network. As a result, prices may increase if demand remains high since the limited supply of new coins.
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