Every four years, the amount of bitcoin doled out to cryptocurrency miners is halved in a process imaginatively known as bitcoin halving (or halving). here’s why and how it works.
bitcoin supply limit
To understand the bitcoin halving, we must first understand the theory behind its supply.
Reading: What is the bitcoin halving
the inventor of bitcoin, satoshi nakamoto, believed that scarcity could create value where there was none before. After all, there is only one Mona Lisa, only so many Picassos, a limited supply of gold on earth.
bitcoin was revolutionary in the sense that for the first time it could make a digital product scarce: there will only be 21 million bitcoins.
The idea of limiting the supply of bitcoin stands in stark opposition to how fiat currencies like the us. uu. I work in dollars. Fiat currencies were initially created with firm rules: to create a dollar, the us. uu. the government needed to have a certain amount of gold in reserve. this was known as the gold standard.
Over time, these rules eroded as economies modernized, during periods of extreme financial uncertainty, such as the Great Depression and World War II, printing more money to help stimulate struggling economies. Over time, these rules evolved into the current system, where governments can (broadly speaking) print money whenever they want.
satoshi nakamoto believed that this devaluation of fiat money could have disastrous effects, so with the code, he prevented any one party from creating more bitcoins.
what is bitcoin halving?
Embedded in the bitcoin code is the maximum limit of 21 million coins. new bitcoin is released through mining as block rewards. miners do the work of maintaining and securing the bitcoin ledger and are rewarded with newly minted bitcoins.
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However, roughly every four years, the mining reward is halved, and each halving reduces the rate at which new bitcoins enter the supply, a process that will likely last until 2140.
a brief history
- 2009: bitcoin mining rewards start at 50 btc per block.
- 2012: first bitcoin halving reduces mining rewards to 25 btc.
- 2016: at the second halving, mining rewards are reduced to 12.5 btc.
- 2020: at the third halving, mining rewards are reduced to 6, 25 btc.
- 2140: The 64th and final halving occurs and no new bitcoins are created.
what’s so special about halving?
If you trust a person, group, or government to set up your money supply, you should also trust them not to mess with it. bitcoin is supposed to be decentralized and trustless: no one is in control and no one to trust. Since bitcoin is not controlled by any one person or group, there should be strict rules about how much bitcoin is created and how it is released.
By writing a full supply and halving event in the bitcoin code, the bitcoin monetary system is essentially immovable and virtually impossible to change. this “cap” means that bitcoin is a kind of “hard money” like gold, the supply of which is virtually impossible to exchange.
what about bitcoin miners?
Bitcoin miners invest money in specialized mining hardware as well as the electricity needed to run their rigs. the cost of this is offset by your mining rewards, but what happens when your rewards are cut in half?
Since the halving reduces the rewards, the incentive for miners to work on the bitcoin network is also reduced, leading to fewer miners and less security for the network.
For this reason, once the last bitcoin is mined, miners (assuming there have been no major changes to the bitcoin protocol) will be rewarded in the form of transaction fees for maintaining the network.
At present, transaction fees represent only a small proportion of a miner’s income: miners currently mint about 900 btc (about $33.5 million) per day, but earn between 60 and 100 btc ($2.2 million to $3.7 million) in daily transaction fee. That means transaction fees currently make up just 6.5% of a miner’s revenue, but by 2140, it will skyrocket to 100%.
“Transaction fees will likely increase in an inverse correlation and as compensation for declining mining returns,” ben zhou, CEO of cryptocurrency exchange bybit, told decrypt.
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It is also possible that the bitcoin reward mechanism changes before the final block is mined. bitcoin currently runs on a proof-of-work consensus mechanism, which has drawn criticism from the likes of tesla CEO elon musk for its high power consumption.
Ethereum, the rival cryptocurrency, is in the process of switching from proof-of-work to the less power-hungry proof-of-stake consensus mechanism, in which the network is protected by having validators that block or “stake” According to the center for blockchain technologies at university college london, proof-of-stake blockchains use several orders of magnitude less energy.
It is possible that bitcoin will do the same. In an interview originally filmed for the German TV show “Galileo,” Niklas Nikolajsen, the founder of Swiss cryptocurrency broker Bitcoin Suisse, was quoted as saying, “I’m sure once the [proof of proof] technology is proven, participation], bitcoin will adapt to too.”
However, despite calls by environmental groups to switch to proof-of-stake, it remains unlikely that a sufficient number of bitcoin validators will support any hard forks that would shift the network to an alternative consensus mechanism.
impact on price
The debate over whether bitcoin halvings affect the price of the cryptocurrency, or whether they are already “priced in”, continues.
According to the laws of supply and demand, a decrease in the supply of bitcoins should increase the demand for bitcoins and, presumably, drive up prices. One theory, known as the stock-to-flow model, calculates a ratio based on the current supply of bitcoin and how much is coming into circulation, with each halving (unsurprisingly) having an impact on that ratio. however, others have questioned the underlying assumptions on which the theory is based.
Historically, after previous halving events, the price of bitcoin has risen, but not immediately, and other factors have played a role.
At the time of the June 2016 halving, the price of bitcoin was around $660; After the halving, bitcoin continued to trade flat until the end of the month, before falling as low as $533 in August. but then the price of bitcoin shot up to its all-time high of over $20,000 by the end of the year, an increase of 2,916%.
Similarly, following the 2020 halving, the bitcoin price rose from just over $9,000 to over $27,000 by the end of the year, but in the two months following the halving, the price did not exceed $10,000. It is also important to note that other factors played into the 2020 bitcoin bull run, in particular, the rise of institutional micro-strategy investment and paypal’s decision to allow its users to buy and hold bitcoin.
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