What is a Bitcoin halving? – everything you need to know
For many people, the technology behind Bitcoin and the blockchain can be difficult to understand. This is mainly because many strange terms are used. One of the terms that causes a lot of confusion is the term Bitcoin halving. What does halving mean? And why is it so important for the blockchain?
Bitcoin halving summarized
- The reward miners receive for their work is halved after every 210,000 blocks
- The number of bitcoins produced grows more slowly as a result, which works deflationary.
- Halving requires more computing power to obtain a bitcoin through mining
- Halving will have less and less effect on the price of Bitcoin.
What is the halving?
In a Bitcoin halving, the reward for miners is halved. New bitcoins are put into circulation as block rewards produced by ‘miners’.
Miners use expensive electronic equipment to earn or ‘mine’ Bitcoin. They do this by solving special mathematical formulas. Whoever does this first receives Bitcoins as a reward for their hard work.
This is where halving comes into play. Every 210,000 blocks, the total number of bitcoins that miners can win is halved. In 2009, the system started with 50 coins being mined every 10 minutes. This reward is then adjusted on average every four years.
What is the effect of halving on investors?
Halving is often positive for investors. With halving, the supply of Bitcoin decreases. With constant demand, you often see the price increase. In the past, the price of Bitcoin has increased significantly around the time of halving.
The effect of halving is decreasing over time. The number of blocks released is decreasing, so the total impact is also decreasing.
What is the effect of halving on miners?
Miners are able to make a profit if their income, the block reward, is higher than the costs they have to make for mining the Bitcoins. These costs include the total energy bills, equipment, and insurance for the equipment.
Miners use expensive electronic equipment to earn or “mine” Bitcoin. They do this by solving special mathematical formulas, and whoever does it first gets Bitcoins as a reward for their hard work.
This is where the halving comes in. Every 210,000 blocks, the total number of bitcoins that miners can win is halved. In 2009, the system started with 50 coins that were mined every 10 minutes. This reward is then adjusted every four years on average.
What is the effect of halving on investors?
Halving is often positive for investors. With halving, the supply of Bitcoin decreases. With constant demand, you often see the price rise. In the past, the price of Bitcoin has increased significantly around halving.
The effect of halving is decreasing, however. The number of blocks released is decreasing, so the total impact is also decreasing.
What is the effect of halving on miners?
Miners are able to make a profit if their income, the block reward, is higher than the costs they have to incur for mining Bitcoins. These costs include total energy bills, equipment, and insurance for the equipment.
Thanks to the halving, miners know better how much they can get for their services in the future. In that respect, halving provides some certainty for miners.
However, Bitcoin halving also creates a lot of uncertainty: the computing power on the network has been unstable for years, as has the delivery time of mining equipment. The halving of the reward in Bitcoin does not necessarily mean a halving of the reward in euros or dollars. If demand remains constant and the growth of supply decreases, the price may rise in the future.
When it becomes less profitable for fewer parties to mine, the number of parties decreases. This makes Bitcoin more vulnerable to a 51% attack.
Technical details of mining & Bitcoin halving
You can skip this section if you’re not interested in the technical details behind Bitcoin halving.
The underlying technology of Bitcoin, the blockchain, consists of a network of computers (also called nodes) that all contain a copy of all transactions. Each node in the system then performs multiple checks to verify if a transaction is correct. When more nodes check the transactions, the network becomes stronger.
Bitcoin mining is the process by which people use computers to verify transactions: this process is also called proof of work. Miners who process the transaction are then rewarded for this. Transactions with larger amounts require more confirmations to be sent.
With a Bitcoin halving, the reward for each block is reduced by half.
What happens after the last Bitcoin halving in 2140?
An important question is what happens after the last halving: because there can never be more than 21 million bitcoins mined.
After the last halving, miners will no longer receive a block reward. By then, they will only earn bitcoins through the transaction fees they charge. This means that transaction fees will play a bigger role in the future.
Does this mean that transactions will become unaffordable? Not necessarily. For example, the advent of Lightning Network has reduced the costs of settling a transaction. This new technology allows transactions to take place on a second layer instead of the original blockchain.
When is the next halving?
Roughly 900 new Bitcoins are mined and brought into digital circulation every day. As the number of halvings increases, the supply of Bitcoins will grow slower and slower until all 21 million BTC coins have been mined. According to the latest predictions, the last Bitcoin will be mined in 2140.
There is no hard date for when the reward for mining a block will be halved. It depends on when the 210,000th block has been mined since the last halving. As roughly 900 new Bitcoins are mined and put into circulation every day, the next halving is expected to take place in early 2024. However, this could shift if there is more demand for Bitcoin in the meantime.
What is the function of halving?
Halving is intended to keep the value of Bitcoin constant. As there will never be more than 21 million bitcoins available, Bitcoin will become more valuable as its price rises.
Governments often print money when they get into trouble. The problem is that this increases the amount of money in circulation, making it worth less over time.
This will not happen with Bitcoin, as the number of new bitcoins entering circulation only decreases. If Bitcoin remains popular, this can have a positive impact on the price of Bitcoin.
Impact of halving on price
The Bitcoin halving attracts a lot of attention, mainly because many investors believe it will lead to a price increase. However, there is no guarantee that a Bitcoin halving will lead to a rising price.
The first halving
Bitcoin has experienced three halvings so far. The 2012 halving was the first to show the potential effect of Bitcoin halving. Until then, the Bitcoin community did not know what effect a sudden drop in rewards would have on the network. It turned out that the price began to rise shortly after the halving, from $11 to $12.
Despite not being a very significant increase, there was still a rising trend in the price of Bitcoin due to the halving. The price eventually rose to over $1100 the following year.
The second halving
On July 16, 2016, the day of the second halving, the price dropped by 10 percent to $610. Shortly after, it shot back up to its previous level. This shows that halving doesn’t always follow the same pattern.
Although the direct impact on the price of bitcoin was small, the market saw a gradual rise in the year following the second halving, eventually reaching a price of $20,000.
Some argue that this increase was a delayed result of the halving. Others believe that it was completely unrelated to the halving, but rather due to the growing popularity of the cryptocurrency. It’s possible that if enough people know in advance that a halving will occur, they will buy bitcoin in anticipation, causing the price to rise before the halving instead of after.
This is also often seen in the stock markets, where investors’ expectations are already reflected in the price. Only when the result differs significantly from expectations do we see a significant price movement.
The third halving
The third halving took place in May 2020, after which a new bullish trend emerged. During the halving, the price was at $9,000, but a new record has since been set. It is difficult to determine whether the halving was the cause of this enormous increase; it is more likely that the increase was due to a lot of extra capital flowing into the market.
How important is the Bitcoin halving for the price?
As an investor, you don’t need to fully understand the technology behind Bitcoin halving. In the past, the halving has had an impact on the price of Bitcoin, but it is difficult to determine the extent to which this was the case. Bitcoin is ultimately influenced by many different factors, making it difficult to predict its price based on a single factor. Therefore, do not invest in Bitcoin solely based on an expected Bitcoin halving.