Bitcoin halving is the process of halving the rewards of mining bitcoin after each set of 210,000 blocks is mined.
By reducing the rewards of mining bitcoin as more blocks are mined, bitcoin halving ensures that the amount of bitcoin in circulation does not increase exponentially, which also tends to put upward pressure on its price.
How It Works
For every 210,000 blocks that are mined, the reward for mining a block falls by half. For the first 210,000 blocks in bitcoin’s early days, the reward was 50BTC per block. As more blocks were mined and more bitcoins went into circulation, the first set of 210,000 blocks were mined by 2012, and the reward was cut in half to 25BTC.
By 2016, the second set of 210,000 blocks were mined, and the reward was cut to 12.5BTC. The latest halving occurred in May 2020, upon the completion of 630,000 blocks (the third set of 210,000 blocks), and the reward is now 6.25BTC per block.
It takes roughly four years for 210,000 blocks to be mined. Consequently, bitcoin halving usually occurs in four-year intervals. The next halving is predicted to take place in 2024.
What is a Block and Bitcoin Mining?
A block on the bitcoin blockchain network is a file that stores 1MB worth of bitcoin transactions. As more transactions occur, the number of blocks storing data on these transactions also increases, and the bitcoin blockchain increases in size. As of December 13, 2020, the size of the bitcoin blockchain is 308 gigabytes (GB), up from just 4.52GB in December 2012.
Miners are people who compete to add the next block to bitcoin’s blockchain network. Miners use powerful computers and solve complex mathematical problems to produce a 64-character hash key that locks the block. For doing so, miners are rewarded in the form of bitcoin.
Why Bitcoin Halving Occurs
The supply of bitcoin is fixed at 21 million. Upon reaching the 21 million mark, the creation of new bitcoins will cease. Bitcoin halving ensures that the amount of bitcoin that can be mined with each block decreases, making bitcoin more scarce, and ultimately, more valuable.
Rationally, the incentive for mining bitcoin would fall with the completion of each halving. However, bitcoin halvings are associated with huge surges in the price of bitcoin, which provides miners with the incentive to mine more, although their rewards are now halved.
Price increases incentivize bitcoin miners to continue mining. On the contrary, if the price of bitcoin doesn’t increase and block rewards are halved, miners may lose the incentive to create more of the digital currency. It is because mining bitcoin requires high amounts of computational power and electricity and can be a costly process.
The Relationship Between Bitcoin Halving and Bitcoin’s Price
History suggests that there is a positive correlation between bitcoin halving and increases in the price of bitcoin. However, it should be noted that price is not only affected by halvings and is dependent on several other factors.
First halving: Upon the first halving in 2012, the price of bitcoin was around $11 and rose to $12. Within a year, the price increased to $1,100.
Second halving: In 2016, the bitcoin network completed 420,000 blocks, and the second halving occurred. Bitcoin fluctuated between $500-$1,000 for a few months and then shot up to $20,000 by December 2017.
Third halving: The third halving took place in May 2020, which marked the beginning of another bull run for bitcoin. When the halving occurred, bitcoin was trading around $9,000. Today, in December 2020, bitcoin is trading near $20,000.
What Happens After the Last Bitcoin Halving?
The last bitcoin halving is predicted to occur in 2040, after which block rewards will not be in the form of bitcoin. After the last halving occurs, miners will be rewarded with fees from network users (i.e., people who buy and sell bitcoin) so that they are incentivized to continue processing transactions on the bitcoin blockchain.