Halving

What is Halving?

Halving is the process that periodically cuts the rate at which new crypto coins enter circulation in half. It is a primary feature of the Bitcoin blockchain.

The Long Definition

Halving is an event during which the supply of new crypto coins is cut in half. On the Bitcoin blockchain, it occurs when mining rewards are cut in half. So far, the network has completed three halving events, the latest in May 2020. There will be numerous more halvings up until the last one, which is predicted to occur in 2140.

These events reduce the rate at which new bitcoins enter circulation. By doing so, they hope to reduce the inflation rate and thus, preserve the coin’s value.

Understanding Halving

The Bitcoin blockchain can be described as a distributed record of Bitcoin transactions. In this record, data is structured in blocks. Each block holds transaction data and is cryptographically linked to the preceding block. That way, the whole thing mimics a chain-like structure, hence the name blockchain.

Before a new block is added to the chain, all the transactions in it must be verified. Since Bitcoin uses a Proof of Work (PoW) consensus mechanism, this work is done by miners. For every block of verified transactions added to the blockchain, participating miners receive a reward, known as a block reward.

The block reward incentivizes miners to keep mining. Currently, for every block successfully mined, miners receive 6.25 BTC as a reward. And it’s this amount that is subject to halving.

On Bitcoin, halving takes place after every 210,000 blocks, approximately every four years. Since the launch of Bitcoin, this has occurred three times;

• The first was in November 2012. It took the block reward from 50 BTC to 25 BTC
• The second halving took place in June 2016. It cut the block reward to 12.5 BTC
• The latest halving was in May 2020. This one cut the block reward to 6.25 BTC, where it stands to date.
• The next halving is expected to be in 2024. It will lower the block reward to 3.125 BTC.

Why Cut Mining Rewards in Half?

Block rewards consist purely of newly created bitcoins. So, they also serve as a means through which new bitcoins enter circulation. Every time a new block is mined (around every ten minutes) the supply of bitcoins in the market increases by 6.25 coins.

But the supply of bitcoins is not meant to increase forever. The creator of Bitcoin, Satoshi Nakamoto, set a limit of 21 million bitcoins. So, once there are 21 million bitcoins in circulation, no more new bitcoins should be released. And halving is implemented precisely to achieve that.

The goal is to periodically reduce the block reward so that by the time the cryptocurrency’s supply reaches 21 million, it will be near zero. With no rewards, miners will stop mining. This means that the number of new bitcoins getting into circulation will be zero.

Today, there are approximately 19.1 million bitcoins. This leaves around 1.9 million to be released over the coming years. At the current halving rate, it will take approximately 118 years for that to happen. The final halving should be around 2140, after which Bitcoin will reach its maximum supply of 21 million coins.

What Effects Does Halving Have?

Halving is part of a long-term plan to fix the supply of Bitcoin at a single amount. However, each halving event has short-term effects. The most apparent of these is that miners receive less BTC for verifying the same amount of transactions. And given that mining gets harder with time, what incentive is there to continue?

Well, in the year that follows a halving event, a certain phenomenon has been observed: the price of Bitcoin goes up.

• During the first halving in November 2012, bitcoin’s price stood at $12. By November 2013, it had risen to $1207.
• Before the July 2016 halving, bitcoin was at $647. In the year afterward, it soared all the way to $2506. It went on to peak at $18,972 in December 2017.
• The latest halving was also followed by an increase in price. Between May 2020 and May 2021, bitcoin’s price rose from $8,821 to $49,504. In between, it peaked at $63,233.

It’s not clear that halving is solely responsible for these price increases, but these increases are important to miners. They offset the loss that comes when halving cuts their rewards in half.

Let’s take the latest halving event as an example. Just before halving, one bitcoin was worth $8,821 while the block reward was 12.5 BTC. That equates to $110,262.50 in rewards.

Today, bitcoin is worth around $16,500. The block reward stands at 6.25 BTC, equating to around $103,125. So, despite the block reward being cut in half, miners earn almost the same amount per block as they did before.

If the price didn’t increase after halving, miners would have no reason to continue working. This is because they would be receiving diminishing rewards for an increasingly difficult task. And without someone to verify transactions, it would be difficult to secure the network.

Bottomline

Bitcoin is the most valuable cryptocurrency. Part of the reason why is that investors know there is a finite supply, which will stop at 21 million bitcoins.

To help achieve this finite supply, the network has a halving mechanism that, every four years, cuts the rate at which new bitcoins enter circulation.