Bitcoin halving is the process of halving the rewards of mining bitcoin after each set of 210,000 blocks is mined. To fully understand what bitcoin halving is, let us take a brief look at what the term ‘Halving’ is.
What Is Halving?
Halving simply put is the act of reducing something by half or dividing something into two equal pieces.
Now that we know what halving is, we can now proceed with what bitcoin halving is, and how it works.
What Is Bitcoin Halving?
Bitcoin Halving is when the number of bitcoin that miners get for uploading new transactions to the blockchain is cut in half.
This rare occurrence takes place after each set of 210,000 blocks has been mined, resulting in a halving of the incentives for mining bitcoin.
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 Bitcoin Halving Works
The supply of bitcoin is limited to 21 million units. The creation of new bitcoins will cease once the 21 million mark is reached. Bitcoin halving ensures that the amount of bitcoin available for mining with each block decreases, making bitcoin more scarce and, as a result, more valuable.
Rationally, the incentive to mine bitcoin would decrease with each halving. However, bitcoin halvings are associated with massive increases in the price of bitcoin, providing miners with an incentive to mine more, despite the fact that their rewards have now been halved.
When 210,000 blocks are mined, the payout for mining a block is cut in half. Each block in the early days of bitcoin contained a reward of 50 bitcoins. By 2012, the first 210,000 blocks were mined, with the incentive cut in half to 25 BTC.
Once another set of 210,000 blocks had been mined, the reward for solving a block was reduced from 25 BTC to 12.5 BTC in the 2016 bitcoin halving. The most recent bitcoin halving occurred in May 2020. When the third set of 210,000 blocks was mined, the reward had been cut in half to 6.25 BTC per block.
According to what we can see, 210,000 blocks are mined in about four years.
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.
Effect Of Halving On Bitcoin’s Value
While experience shows that the price of bitcoin tends to rise following a halving, this does not necessarily mean that halving causes an increase in the price of bitcoin. Although pricing is strongly influenced by halvings, it is also strongly influenced by 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 at around $9,000. Today, in December 2020, bitcoin is trading near $20,000.
FAQs
When Is The Next Halving
From the previous halving, we could tell that the total amount of 210,000 blocks are mined in about four years so we expect the next halving to occur in 2024.
What happens after the maximum number of bitcoins has been issued?
The last halving is predicted to occur in 2140, after which block rewards will not be in the form of bitcoins. Instead, miners will be rewarded with fees from network users, the people who buy and sell bitcoins, so that they are incentivized to continue processing transactions on the blockchain.
Conclusion
Bitcoin halving is a much-publicized event that occurs every four years, with the first one occurring in 2012. It’s part of the virtual currency’s programming to keep its total supply constant.
As an investor, you should be aware of Bitcoin halvings because they have historically resulted in significant price fluctuations. The next halving is expected in 2024.
