Bitcoin halving, also known as "the halvening," is a process built into the bitcoin code that occurs approximately every four years. This process aims to control inflation by decreasing the block reward received by miners.
To understand precisely what halving is, it is essential to know how the bitcoin blockchain is managed.
The bitcoin blockchain is managed through a decentralized network of computers, known as nodes, that work together to validate and record transactions. Each node maintains a copy of the entire blockchain and uses consensus algorithms to ensure all copies are identical.
When a new transaction is made, it is broadcasted to the entire network. Nodes then validate the transaction by checking that the sender has enough bitcoin to complete the transaction and that the bitcoin in this transaction has not already been spent. Once a transaction is validated, it is grouped with other transactions into a block and forwarded to miners.
Miners then compete to solve a complex mathematical equation known as the proof-of-work mechanism that is associated with the block. The miner who solves the task and adds the block to the blockchain is rewarded with transaction fees from the transactions in the block, and a certain number of bitcoins called the block reward. It is through this process that new bitcoins are issued.
To summarise:
The Bitcoin blockchain is managed through a decentralized network of nodes that validate transactions. Miners collect transactions and solve complex mathematical problems to add a new block to the blockchain, and are rewarded with transaction fees in addition to newly issued bitcoins, called the block reward.
When bitcoin was first created, the block reward for miners was set at 50 bitcoin per block. The bitcoin halving process is programmed to occur every 210,000 blocks, reducing the block reward by half. This means that the first bitcoin halving occurred in November 2012, reducing the block reward from 50 to 25 bitcoin per block. The second bitcoin halving occurred in July 2016, reducing the block reward to 12.5 bitcoin per block. The third bitcoin halving occurred in May 2020, reducing the block reward to 6.25 bitcoin per block. The next bitcoin halving will happen in 2024 when the block reward will fall to 3.125.
The halving process is a crucial aspect of Bitcoin's monetary policy. It is designed to control the rate at which new bitcoin are released, ultimately controlling inflation. As the block reward decreases, the rate at which new bitcoin are released decreases. This helps to ensure that the total number of bitcoin in circulation remains relatively stable, preventing the currency from experiencing hyperinflation.
The impact of Bitcoin-halving on the price of bitcoin can be observed in the past by looking at the price movements leading up to and following each halving event:
1. First Bitcoin halving (2012): The first halving occurred in November 2012, reducing the block reward from 50 to 25 bitcoin per block. In the months leading up to the halving, the bitcoin price had been steadily increasing, from around $10 in January 2012 to approximately $12 in November 2012. After the halving, the bitcoin price continued to grow, reaching a peak of approximately $260 in April 2013.
2. Second Bitcoin halving (2016): The second halving occurred in July 2016, reducing the block reward to 12.5 bitcoin per block. In the months leading up to the halving, the bitcoin price had been on a steady upward trend, from around $400 in January 2016 to about $650 in June 2016. After the halving, the bitcoin price continued to increase, reaching an all-time high of approximately $19,000 in December 2017.
3. Third Bitcoin halving (2020): The third halving occurred in May 2020, reducing the block reward to 6.25 bitcoin per block. In the months leading up to the halving, the bitcoin price had been on a steady upward trend, from around $7,000 in January 2020 to approximately $10,000 in April 2020. After the halving, the bitcoin price continued to increase, reaching an all-time high of around $64,000 in April 2021.
It is worth noting that the total number of bitcoins that can exist is limited to 21 million, so once all bitcoins have been issued, no more new bitcoins will be generated. This is built into the Bitcoin code to control inflation and ensure the scarcity of digital currency.
Miners will still be able to participate in the network by verifying transactions and adding them to the bitcoin blockchain. Instead of block rewards, they will receive transaction fees paid by users who want to transfer bitcoin. Transaction fees will become the primary source of income for bitcoin miners.
Bitcoin halving is a significant event in the cryptocurrency world, and it can affect the price of bitcoin and the mining industry. It is a reminder of the inherent scarcity of Bitcoin and its unique monetary policy, and the control on inflation that it offers. Understanding the halving process is essential to understanding the economics of Bitcoin.
This text is intended to inform and is not an investment recommendation.
