Bitcoin, the flagship cryptocurrency, introduced several new concepts to the financial ecosystem. These differences have helped it to stand out over the years, as the ultimate hedge against centralization and inflation that sometimes plagues traditional finance alternatives.
One of the most important of these is called its “halving” event. If you’re new to the crypto ecosystem or looking for a way to understand the Bitcoin network a little bit better, then this guide will walk you through everything you need to know about Bitcoin halving and why it is so important.
So What Is the Bitcoin Halving?
One of the most important aspects of the Bitcoin network is its miners. These miners are responsible for using powerful computers to solve complex mathematical puzzles on the network. By so doing, they get the rights to verify BTC transfers and thus add more blocks of transactions to the chain (this is where the name blockchain comes from).
When miners successfully solve these mathematical puzzles, they are rewarded with a certain amount of Bitcoin for their “work” (this is also where the name Proof of Work comes from). With all of the above being said, the Bitcoin halving refers to the event where the rewards for mining new blocks on the blockchain are reduced by half.
This means that miners receive 50% fewer Bitcoins for the same amount of work on the network. The said event occurs once approximately every four years, or after every 210,000 blocks are mined.
Why Does the Bitcoin Network Need Halvings?
At this point, one might ask why Bitcoin mining rewards are halved after a specific number of blocks have been mined. The answer to this lies in inflation.
Mining is the only way in which new Bitcoin is released into circulation. By reducing the rate at which fresh Bitcoin enters the market every four years, the Bitcoin supply is sure to be controlled. Halvings introduce scarcity into the equation, which is a principle that can influence its value over time.
Another major question to ask is how miners manage to stay in business if they receive half the amount of Bitcoin for the same amount of work. This is where Bitcoin’s price dynamics come in. BTC, as a cryptocurrency, works in boom-and-bust cycles every four years, in which the markets see a bull run, before a bear market and then a bull run again, as the cycle continues.
Bull runs typically occur after halvings, and involve a rapid increase in price for Bitcoin. At the end of the day, the miners stay in business as BTC prices rise, despite their rewards being halved.
A Brief History of Bitcoin Halvings
Bitcoin has been through several halving events since its launch. The first happened in 2012, and is regarded as the first Bitcoin halving. This event reduced the mining rewards from 50 to 25 Bitcoins per block.
The second Bitcoin halving occurred in 2016, where rewards were further reduced from 25 to 12.5 Bitcoins. The 2020 halving saw the rewards cut down to 6.25 Bitcoins per block and birthed the last bull run, which saw Bitcoin claim the $69,000 zone. This event also birthed the brutal 2022 bear market, where Bitcoin effectively crashed in price from $69,000 to as low as $15,000.
The 2024 halving is the most recent one and occurred in April of the same year. This event reduced rewards to 3.125 Bitcoin per block.
Per estimates, these halving events will likely continue until around 2140, when the maximum supply of 21 million Bitcoins will be reached and released. By then, the scarcity of Bitcoin would have hit an all-time high, and its value would have hit sky-high levels.
Why Does Halving Matter?
If the importance of Bitcoin halvings hasn’t been established yet, then here is a simple way to put things: Halvings play the most important role in Bitcoin’s economic model. These events help to reduce the rate at which new Bitcoins are introduced into supply. This helps to control inflation and make sure that the cryptocurrency’s supply is finite.
Secondly, economic principles show that a reduced supply (assuming that demand remains steady or even increases), can lead to massive increases in price. While halvings decrease rewards, they also show the importance of transaction fees, which will become the main incentive for miners once all Bitcoins have been mined.
How Do They Affect The Price of Bitcoin?
From a historical perspective, halving events have been associated with massive Bitcoin price movements. For example, soon after the 2012 halving, Bitcoin rose from around $12 to over $1,000 within a year. The same thing happened again after 2016, when the price surged from around $650 to nearly $20,000 by the end of the following year.
To further put things into perspective, the 2020 halving saw Bitcoin hit a new high of $69,000, all the way from around $12 in the following year. While these trends show that there is a correlation between halvings and price increases, it is also important to note that other factors like market sentiment, technological advancements, macroeconomic indicators and others, also play major roles.
How Do Halvings Affect Miners
For the miners, the halvings present both problems and opportunities. For example, the immediate rewards for mining blocks is halved for the miners, making it hard to purchase more mining equipment, or pay for the electricity to run them. In addition, smaller miners might find it harder to compete with larger ones, in a scenario that can lead to centralization if too many large miners take the reins.
On a broader scale, halving events can lead to increased speculation on Bitcoin, therefore leading to harsher market volatility. The scarcity that mining introduces also attracts institutional investors, who tend to buy in the billions. This can add more legitimacy to Bitcoin, but can also increase its price volatility, not to mention further centralization risks.
Finally, as Bitcoin gains more attention after its halvings, regulatory bodies may increase scrutiny that might affect its adoption and use.
What Happens When All Bitcoins Are Mined?
So what happens when all 21 million Bitcoins are mined and no new coins are created? Does this mean that the network will stop working? Not necessarily. Miners will still earn rewards for their work. However, instead of earning block rewards, they will make their profits from transaction fees paid by users.
If Bitcoin continues to grow in usage and value, these fees will be enough to sustain mining. Keep in mind that the final Bitcoin is expected to be mined over a century from now. This means that there is still plenty of time to see how things play out.
Investor Reactions And The Influence Of Halvings
Historically, every halving tends to spark a mix of emotions among investors, including excitement and plenty of FOMO (fear of missing out). Traders often speculate on price movements well before the halving date, and Bitcoin tends to become more volatile when the day does come.
Some investors “buy the rumor, sell the news,” and push prices up just before the halving event, only to sell shortly after. Others take a long-term view in their beliefs that the halving strengthens Bitcoin’s fundamentals.
Bitcoin may be the original, but its halving mechanism has inspired similar moves from other networks. Crypto networks like Litecoin, Bitcoin Cash and Zcash all undergo halvings to manage inflation and mimic Bitcoin’s scarcity model. Still, Bitcoin remains the most influential network by far.
Preparing for the Next Halving
There are many ways to prepare for the next halving. For investors and enthusiasts, it is always a great idea to stay informed. Try to understand the mechanics and history of halvings, for a better chance at more informed decisions. Investors should consider diversifying investments, to hedge against wild price movements after halvings.
Finally, it is always a good idea to monitor market trends and sentiment for better insights into how prices might perform. Overall, the Bitcoin halvings are more than just another technical event.
They are a fundamental aspect of Bitcoin’s design, that are important for maintaining its supply and its value. Understanding halvings and why they occur, can help stakeholders to better navigate the Bitcoin space and make better decisions altogether.
