Bitcoin Halving Explained
Halving is a term describing the event that occurs every 210,000 blocks. It cuts miners’ reward in half for verifying Bitcoin transactions in a block.
Bitcoin’s target block-solving time is 10 minutes. From this information, we can calculate in advance when the halving will occur, and that is approximately every four years.
Bitcoin Supply Schedule
The maximum supply of Bitcoin is 21 million, which is predicted to be reached in 2140.
There will be only 21 million bitcoins ever. The number of bitcoins is limited, which implies their scarcity. A fixed maximum supply is a built-in feature making Bitcoin deflationary. A key way to keep inflation under control is by decreasing the issuance rate of new Bitcoins coming into circulation.
Deflation is a decrease in the price of goods and services. Bitcoin is deflationary because when the value of Bitcoin goes up, the cost of paying for things in BTC goes down as a result of an item’s fiat monetary value staying the same.
What Is the Halving
The purpose of the halving is to decrease the rate at which new bitcoins are issued until Bitcoin’s maximum supply reaches its hard cap.
Bitcoins come into circulation (are issued) through a process called mining. Miners validate blocks by using energy (a CPU-intensive calculation) and are successful on average every 10 minutes. That is approximately 144 blocks per day.
Miners get a reward for successfully validating a block. This mechanism of newly issued bitcoins also serves as an incentive for miners to secure the network and keep it honest.
A block is a set of transactions and a basic unit of the blockchain. A blockchain, or digital ledger, is a chain of blocks.
The block reward is considered compensation for the miner’s expenses, including energy consumption and equipment. When they receive the block reward, they sell a portion of the bitcoins to cover expenses. After the halving, miners will receive half as many bitcoins as a reward.
Since Bitcoin went live on January 3, 2009, with the Genesis block, over 18 million bitcoins have entered circulation. At launch, Bitcoin’s supply started at 0. To slowly reach the maximum supply of 21 million, bitcoins are periodically released into circulation, first at the rate of 50 bitcoins every 10 minutes, now at 12.5 BTC. After the halving event, it will be 6.25 BTC every 10 minutes.
- 2012 Block 210,000 cuts the current 50 BTC block reward to 25 BTC.
- 2016 Block 420,000 cuts the current 25 BTC block reward to 12.5 BTC.
- 2020 Block 630,000 will cut the current 12.5 BTC block reward to 6.25 BTC.
Halvings are an important part of the Bitcoin protocol. They provide predictability for Bitcoin issuance, enforce Bitcoin’s scarcity, and keep the network secure and honest. Some think of it as a core proposition of the digital asset.
It is traditional for the price of Bitcoin to be volatile around the date of the halving. It is believed that this happens because agents receive a signal that the assets coming into circulation are getting scarcer. However, there is no hard evidence to prove what impact the halving has on price.
Some predict a Bitcoin price rally based on previous market reactions when the price of Bitcoin went up noticeably. This argument relies on the theory that when demand holds steady, a supply change will increase the price of an asset. A reduced supply of newly issued bitcoins signals scarcity. Miners get half of what they did at the same cost, and traders enter the market to speculate on it.
TradeBlock estimates the average cost to mine one BTC jumping to $12,252 after the halving, which is almost double the cost today ($6,851).
Fun Fact: In March, Aantopolous joked on Twitter that people misunderstood the halving when BTC saw a 50% price drop: “I think y’all misunderstood the term ‘halving’” - Twitter post.