What is Bitcoin Halving?

By Ehis Ohiwerei

Financial markets thrive off scarcity. Scarce commodities are often valued higher than their more abundant counterparts, and this applies to the value of currencies, especially cryptocurrencies.

A good example is Bitcoin. At its inception, there were two foundational protocols to aid in its value consistency and help with its scarcity. One of which is the highest number of bitcoins to exist.

In 2020, there were less than 2.5 Bitcoin remaining to be mined, which would have tallied Bitcoin numbers to 21 Million. This protocol makes it inevitable that the total number of bitcoins in the market will be at most 21 million at all points in time. The second protocol is the halving protocol.

The halving protocol is simply the process by which the amount of “new” Bitcoin added to the ecosystem will be reduced by half by the algorithm every four years. This means that if 1 million bitcoins are mined and supplied to the crypto ecosystem, at the end of 4 years, their value will be reduced by half to five hundred thousand (500,000).

This process will repeat itself every four years. Remember that the total number of bitcoins that can exist is 21 million. As we gradually approach that number, the halving event becomes essential to keep the value of Bitcoin at its maximum.

Bitcoin halving is crucial because it marks the drop in the rate of new bitcoin being produced and the enforcement of a synthetic price inflation until all bitcoins are released.

In 2019, the bitcoin reward for a miner for each block mined was about 50 bitcoin, which was halved to 25 in the first halving event. Four years later, that value went down to 12.5, and sometime in 2020, the value became 6.25 bitcoin per block.

In 2024, the value is expected to be 3.125 bitcoin per block mined. If you are wondering what will happen to miners when all bitcoins have been mined, the reward system for them has been designed so that miners will be rewarded with fees at the end of the day.

After all, 21 million bitcoins have been mined. Miners will begin to earn rewards from the transaction and processing fees paid by network users. This process is designed to aid the network and serve as an incentive for miners in the ecosystem.

How Does Bitcoin Halving Work?

Unlike printed fiat currencies, bitcoin is mined electronically by miners for the ecosystem’s growth. The process is complex and can easily be explained by saying a global network of computers exists to verify that a Bitcoin transaction is valid. A bitcoin is said to have been mined when such a transaction is confirmed.

These transactions are then verified in groups, also known as blocks, which is what the ecosystem rewards. The second protocol put in place by coders to aid the value of bitcoin by keeping it scarce is halving and halving works by relying on the bitcoin ecosystem’s blockchain software.

After transactions in blocks have been verified and rewarded, the network is coded to halve these rewards received by miners after every 210,000 blocks have been confirmed.

Also read: What is DeFi?

Bitcoin Halvings: Key Events

Bitcoin halving events will continue to occur for every 210,000 blocks until around 2140, the projected year that all 21 million bitcoins will be available in the network.

However, some notable historical dates have been vital to understanding the halving event and process.

  • 3 January, 2009: This is the year Bitcoin was launched and the ecosystem came into existence. At its inception, there was a zero block number, as the first bitcoin was seen as the genesis block. This block produced 10,500,000 BTC between events; the block reward was 50 new BTC.
  • 28 November, 2012: The first Bitcoin halving event happened on the 28th of November 2012 after miners verified the first 210,000 blocks. This event saw a reward of 25 new NTC, half of what was given at inception, and a total of 5,250,000 BTC between events.
  • 9 July, 2016: The second Bitcoin halving event happened on the 9th of July 2016 after miners verified 420,000 blocks. This event saw a reward of 12.5 new NTC, half of what was given at the first halving event, and 2,625,000 BTC between events.
  • 18 May, 2020: The third Bitcoin halving event happened on the 18th of May 2020, following the verification of 630,000 blocks of Bitcoin transactions. This event saw a reward of 6.25 new NTC, half of what was given at inception, and a total of 1,312,500 BTC between events.

The next major Bitcoin halving event is expected to happen sometime in 2024. A total of 740,000 blocks of Bitcoin transactions have been verified by the global network of computer miners used for these purposes.

The reward then will be 3.125 new BTC, half of the third halving event reward, and you should expect that the total number of bitcoin produced between events will be 656,250 BTC.

Also Read: What is the Litecoin Halving Event

The Impact of Bitcoin Halving on BTC’s Price

The halving event over time has had both negative and positive effects on the Bitcoin ecosystem. An impact on the ecosystem will directly affect the price of bitcoin. The cost of Bitcoin has increased since it was first launched and has also seen drastic decreases.

Sometime in early 2021, bitcoin traded for about $63,000 and, in November of the same year, reached an all-time high of $68,000.

Positively, because a bitcoin halving signifies a reduction in the amount of bitcoin available, historically, the price of BTC has been known to go higher when a halving event is approaching.

Due to its impact on the ecosystem and on miners, who are practically the producers of Bitcoin, the miners are known to adjust their selling prices to counteract the actions of the halving event and balance out their cost of production. This singular act by the miners has increased the value and prices of BTC over time.

Negatively, the halving event reduces the reward for miners. This is a form of disincentive, as miners must add new transactions to the blockchain to make money. Some miners need the incentive to carry on when the reward is halved.

This hurts the Bitcoin ecosystem as miners’ rewards are directly tied to the stream of new Bitcoin that comes into the ecosystem’s circulation.

By design, bitcoin is a deflationary asset; however, like every currency, it is prone to inflation because of its trading activity. The overall benefit of the Bitcoin halving event is its attack on the inflation rate of BTC. To keep Bitcoin at bay, the halving event is crucial.

Over time, the inflation rate after a halving event has dropped drastically due to the friction of demand and supply of bitcoin. The prices of bitcoin rise as supply decreases due to halving and demand increases. This process directly impacts the purchasing power of Bitcoin, which keeps inflation at bay.

Also read: What is Bitcoin?

When was the First Bitcoin Halving?

The first Bitcoin halving event happened four years after it launched. In November 2012, the second protocol created to keep the value of the BTC as steady as possible kicked into motion when miners verified 210,000 blocks of Bitcoin transactions.

This event saw the reward for miners halve from 50 new BTC per block to 25 new BTC per block, and the value of bitcoin between events fell from 10,500,000 BTC to 5,250,000 BTC.

When is the Next Bitcoin Halving Event?

The truth is people have yet to learn when the next halving event will happen. The Bitcoin halving happens after 210,000 blocks of transactions have been verified by miners, and the projected time for this to happen is 4 years.

Since the last halving event occurred in May 2020, the projected time for the next event is 2024. Sometime in 2024, the Bitcoin halving event is expected to take place. The value of miner rewards will be halved to 3.125 new BTC and 656,250 BTC produced between events.

At the next halving event, a total of 740,000 blocks of transactions will have been verified by miners, taking us closer to 2140.

What Happens When There are no More Bitcoins Left?

In 2140, there will likely be no more Bitcoin left to mine, and this has left users and experts wondering what will happen to the ecosystem and miners. There have been a lot of speculations as to what this phenomenon will mean regarding the price of bitcoin, miners’ reward, the purchasing power of BTC, the demand and supply of bitcoin, and other market friction in the cryptocurrency ecosystem.

Because we cannot tell the future, it is hard to ascertain or debunk some of the narratives being passed around. Here is a list of the few things we know will happen when there are no more bitcoins to mine.

Also read: What are NFTs?

Miners Reward

When no more bitcoins are left to mine, the halving event will end, and so will the miners’ reward. Miners will then begin to earn their money from transactional fees users in the ecosystem carry out with Bitcoin.

Transactions Will Continue

Although there is no more Bitcoin to mine, transactions will continue. Bitcoin is a digital currency used in trading and all sorts of other things in the decentralized financial system. Hence transactions will still be carried by users in the system. These transactions will still need to be validated by miners.

21 Million Bitcoins

The first protocol created to keep the value of bitcoin at the maximum possible is to total the number of bitcoins miners can mine. When there are no more bitcoins to be mined, this will signal to the ecosystem that there are now 21 million bitcoins.

Value of Transaction

It is expected that the value of transactions at that point will increase. And this is because the volume of transactions going on then will be enormous. With about 21 million bitcoins in circulation, users will be paying a high fee for transaction verification by miners, increasing bitcoin’s value to a more excellent nominal market value.

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What is Bitcoin Halving?

What is Bitcoin Halving?

By Ehis Ohiwerei - min read
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