What Is Bitcoin Halving and Why does it Matter?

Bitcoin is a peer-to-peer computer network that runs a decentralized digital money and has a finite number of 21 million coins that can ever be mined, unlike other currencies. It contains a mechanism called halving, which cuts the number of new Bitcoins generated per block by 50% every 210,000 blocks, or roughly every four years, to ensure that this supply is spread progressively and equally over time.

A key occurrence for Bitcoin is the halving since it has an impact on its value proposition, security, and supply and demand dynamics. We will describe halving in this blog post, including what it is, how it operates, when it happens, and how it affects the price of Bitcoin.

What Happens When Bitcoin Halving?

Proof-of-work (PoW) is a technique that Bitcoin utilizes to authenticate transactions and add new blocks to its blockchain. PoW demands that miners use their processing capacity to solve challenging mathematical puzzles. Each block has a unique solution, and the first miner to discover it is rewarded with newly mined Bitcoins. This payment encourages miners to protect the network and carry out transactions.

The award is not set in stone, though. Every 210,000 blocks, or roughly every four years, it is planned to decrease by half. This implies that every four years, there are 50% fewer new Bitcoins entering the market every block. This method is referred to as halving or halvening.

The halving guarantees a limited and predictable supply of new Bitcoins, preserving its rarity and worth over time. Additionally, it stops coin dilution and inflation. The network becomes more secure and resistant to attacks as a result of the halving, which also raises the cost and difficulty of mining.

When does the Bitcoin price halve?

The unidentified person who created Bitcoin, Satoshi Nakamoto, mined the first Bitcoin block on January 3rd, 2009, known as the genesis block. 50 Bitcoins were awarded as the initial block reward. There have been three halvings since then:

• Block 210,000 saw the first halving on November 28, 2012. A 25-Bitcoin block reward has replaced the previous 50 Bitcoin block reward.
• Block 420,000 saw the second halving on July 9th, 2016. From 25 Bitcoins per block to 12.5 Bitcoins per block, the block reward was decreased.
• Block 630,000 had the third halving on May 11, 2020. 6.25 Bitcoins instead of 12.5 Bitcoins were given as the block reward.

At block 840,000, the subsequent halving is anticipated to take place in April or May 2024. 3.125 Bitcoins per block instead of 6.25 Bitcoins will be the new block reward. When there are 21 million Bitcoins in circulation, the final halving is anticipated to take place in 2140.

Overview of the rewards before and after each Bitcoin halving

How Does the Price of Bitcoin Affect the Halving of Bitcoin?

By altering the market’s supply and demand dynamics, the halving has an impact on the price of Bitcoin. The halving lowers the quantity of new supply by lowering the rate at which new Bitcoins are produced. This produces a scarcity effect that may boost Bitcoin’s demand and value.

Historically, the halving has been followed by significant price increases in the months and years after the event. For example:

• After the first halving in 2012, the price of Bitcoin increased from $12 to $1,000 in one year.
• After the second halving in 2016, the price of Bitcoin increased from $650 to $20,000 in one year and a half.
• After the third halving in 2020, the price of Bitcoin increased from $8,800 to $60,000 in one year.

Bitcoin price development approx. 180 days before the halving event

The price of Bitcoin is influenced by a number of different factors, not only the halving. The price can also be influenced by other elements like market mood, acceptance, legislation, innovation, competition, and world events. Therefore, it is impossible to say with precision what effect the next Bitcoin price halving will have.

What happens if all Bitcoins are mined?

Bitcoin is a digital currency that has a limited and predictable supply of 21 million coins. However, the actual number of Bitcoins that will ever be issued is slightly lower than that, due to the rounding down of some fractions of Satoshis, the smallest unit of Bitcoin. Therefore, the final Bitcoin (or Satoshi) is not expected to be mined until the year 2140. [1]

When all Bitcoins have been mined, the miners will no longer receive block rewards, which are the newly created Bitcoins that they get for validating transactions and creating new blocks. They will only earn from the transaction fees, which are the payments that users make to have their transactions included in a block [2][3].

This means that the miners will have to rely on the demand and value of Bitcoin transactions to sustain their operations and secure the network.

The halving of the block reward, which occurs every 210,000 blocks or roughly every four years, is a key feature of Bitcoin’s design that ensures its scarcity and value over time. It also affects its security and price dynamics by altering the supply and demand balance of the market. [4]

Historically, the halving has been followed by significant price increases in the long term, but there are no guarantees that this pattern will repeat itself in the future. The price of Bitcoin depends on many factors that are beyond the control of the halving. [5]

• Therefore, what will happen after all Bitcoins are mined is not certain, but it will likely depend on how the Bitcoin community and market adapt to the changing conditions. Some possible scenarios are:
• The transaction fees will increase to a level that makes mining profitable and incentivizes miners to keep securing the network.
• The transaction fees will remain low or decrease due to competition or innovation, which will make mining unprofitable and reduce the security and decentralization of the network.
• The Bitcoin protocol will be modified to introduce a new source of revenue for miners, such as inflation or subsidies, which will change the economics and politics of Bitcoin.
• The Bitcoin network will be replaced or supplemented by another layer or system that provides faster, cheaper and more scalable transactions, such as the Lightning Network or sidechains, which will reduce the reliance on miners and fees.

These are just some hypothetical examples, and there may be other outcomes that are not yet foreseeable. The future of Bitcoin after all Bitcoins are mined is ultimately up to its users, developers, miners and investors, who will have to decide how to best preserve and enhance its value proposition as a decentralized, censorship-resistant and sound money for the world.

Conclusion

The main architectural element of Bitcoin that guarantees its restricted and predictable supply, its scarcity, and its value over time is its halving. By changing the market’s supply and demand dynamics, it also has an impact on its security and pricing dynamics.

The next block reward halving is anticipated to take place in 2024, when it will decrease from 6.25 Bitcoins to 3.125 Bitcoins per block. As a result, the annual inflation rate for Bitcoin will drop from about 1.8% to about 0.9%.

Long-term price increases have been linked to the past price halvings, but there is no assurance that this trend will hold in the future. Many variables outside of the halving’s control affect the price of Bitcoin.

The best way to approach the halving is to be aware of its effects, but not to rely on them to determine Bitcoin’s price alone. Instead, one should concentrate on Bitcoin’s fundamentals and long-term goals as a decentralized, censorship-resistant, and reliable form of global payment.

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[1] https://www.investopedia.com/tech/what-happens-Bitcoin-after-21-million-mined

[2] https://www.coindesk.com/learn/what-happens-when-all-Bitcoin-are-mined/

[3] https://paxful.com/university/what-happens-when-all-21-million-Bitcoins-mined/

[4] https://www.investopedia.com/tech/what-happens-Bitcoin-after-21-million-mined/

[5] https://river.com/learn/what-will-happen-after-all-Bitcoin-mined

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