A Bitcoin halving is when the payout for mining a new block is halved, and this happens after every 210,000 blocks (approximately four years). The first of which happened in 2012, and the next will occur in 2024. We will discuss what happens in a Bitcoin halving, why it is a big deal for those involved with bitcoin mining, and its impacts on investors and the coin in general.
Bitcoin Halving Basics
To explain what a Bitcoin halving is, it is worth taking a small step back to explain the moving parts.
All cryptocurrencies using blockchains have a protocol system they utilize to reach an agreement between their distributed nodes to determine a single state of the network. This system is called their “consensus mechanism.” These protocols make sure that every node is synchronized with every other node, agreeing on the transactions of a new block, confirming that they are all legitimate, and then will be added to the blockchain.
There are different kinds of consensus mechanisms, and the Bitcoin network uses a Proof of Work (PoW) consensus mechanism. Under this system, the distributed nodes that must gain consensus are miners who compete to confirm the new block. These machines will “mine” Bitcoins by solving complex mathematical computations that verify the Bitcoin transactions. Each device uses a brute force method to get the correct answer making millions of guesses per second to find the correct answer.
If a miner wins the race to solve the mathematical hash puzzle, then they are provided a reward. This reward is standardized by the Bitcoin network.
Hash– A mathematical function which converts an input of arbitrary length into an encrypted output (a long string of numbers) of a fixed length.
Bitcoin halving is the scheduled reduction of the miner reward subsidy. According to Bitcoin’s blockchain protocol, the Bitcoin block reward gets cut in half after every 210,000 blocks are created. The original reward for creating a new block, back when the mysterious Satoshi Nakamoto started Bitcoin in 2008, was 50 Bitcoin, and over the three halvings so far, this reward has fallen to 6.25 Bitcoin.
Bitcoin Halving Dates History
Data courtesy of coinwarz
The halving schedule of every 210,000 blocks is programmed into the Bitcoin source code, and the idea was for a halving to happen every four years. This schedule is not set in stone and can be slightly different because the time to create 210,000 blocks can vary based on how fast the miners can solve the mathematical puzzle for the hash. The mining algorithm has a target for new blocks of once every 10 minutes, but as more miners join/leave the network the network’s hashrate and time to solve the puzzle increases/decreases. This issue is solved by updating the mining difficulty about every two weeks. The network has in general, grown exponentially, and the average time for a new block is almost always below the target 10 minutes. If you look at the past schedule, it is talking about 3 to 4 months less than the four-year halving scheduled to complete 210,000 blocks.
What are the Effects of Bitcoin Halving?
The halving obviously results in a reduction of the reward for the creation of new blocks. The next halving will lower it down to 3.125 Bitcoin.
Bitcoin mining involves large companies or groups working together to share the Bitcoin rewards. The hardware is purpose-built for mining Bitcoin, and depending on the network’s hashrate, and hashrate of the miner will determine the average revenue they can generate. Miners also need to factor in their energy costs.
Hashrate– is a measure of how many calculations (guesses of the hash) can be performed per second and can be measured in billions, up to quintillions. A hashrate of 1TH/s = one trillion calculations per second.
For anyone in the mining business, a halving is a significant event because what you were making last week is now half this week. Imagine if a gold mine knew that the gold it was pulling out of the ground would be halved every four years. Bitcoin miners’ costs remain the same; however, their revenues go down by about half. With halvings, there are often a small group of miners that no longer think it is viable for them to be mining, and they will leave to use their rigs for mining other cryptos. This does lower the network’s hashrate to a small degree which is a positive for the miners who choose to stay but does not make up for the loss of income.
Bitcoin Halving Economics
The halving reduces the new coin creation rate lowering the supply, and halvings usually bring a lot of press and new buyers, which increases supply. This has had implications for investment similar to other assets with finite or low supplies, such as precious metals, which have higher demand and prices are pushed higher.
Bitcoin has a fascinating inflation curve:
The blue line shows the total supply of Bitcoin, which in 2022 stands at nearly 19 million. Every day Bitcoin inches closer to its maximum of 21 million total supply (around the year 2140). The orange line is the inflation rate of Bitcoin that every four years (each halving) decreases by half. The current rate is below 2% and will continue to fall with every new block and halving.
The Theory Behind Halving
The theory of halving is that the following chain reaction would occur:
Reward is halved → inflation halved → reduced available supply → increased demand → price increase→ miners’ incentive remains, regardless of smaller compensation, increasing Bitcoin’s value in the process
If demand and price are not increased with the halving, miners will all quit because the reward is smaller, and Bitcoin’s value doesn’t increase. However, there is a mechanism to help. If the reward is halved and Bitcoin’s value does not increase, the mining difficulty can be altered to make mining easier. This means that the reward remains the same, but the processing difficulty is also reduced.
Three halvings have proven successful, with only a few miners quitting because Bitcoin’s price increased more than making up for the initial revenue loss. The crashes after the approximate one-year runup have maintained prices higher than when the halving event was completed.