A halving event is an occurrence where the number of bitcoins put into circulation by the Bitcoin network is reduced by 50%. Specifically, it’s when the reward for mining one new block of bitcoin halves. The Halving occurs every 210,000 blocks. This description may seem a bit technical, so allow me to walk you through some important points before I explore what it all means in context.
Bitcoin’s block generation rate is controlled by a protocol implemented by the bitcoin mining community. Currently, the average time between blocks is about 10 minutes. Blocks are generated roughly every 10 minutes, on average. At that rate, 10 million new bitcoins per year will be born into the system (or 2140 new coins in total).
For Bitcoin to support a growing economy at this pace and beyond, each block mined after the 210,000 mark will yield 50% fewer bitcoins than those generated before it. Or, put another way, every 210,000 blocks mined is the equivalent of 10 minutes.
Since every 10 minutes yields the same number of bitcoins (on average), the supply of new bitcoins is directly tied to how long it takes for miners to generate a block. Halving events represent block #210,000 progressing every 210,000 blocks (approximately every four years). If a halving event happens in 2020, for example, that means a 10-minute period will happen 5 times before the 2020 halving event.
The blockchain is the technology that underpins Bitcoin. At its most fundamental level, the blockchain is a collection of computers (also known as nodes) that run Bitcoin’s software and store either a partial or entire history of transactions that have occurred on Bitcoin’s network.
Within the Bitcoin network, the responsibility of deciding whether or not to accept a transaction rests with each full node. A full node is a node that stores the complete history of Bitcoin transactions.
To accomplish this goal, the node will run several tests to determine whether or not the transaction is legitimate. Among these are making sure that the transaction includes all of the necessary validation factors, such as nonces, and that its length does not go above what is required.
Each transaction requires a separate authorization. This is stated to take place only after each transaction that is included in a block has been validated. Following the transaction’s approval, it is added to the currently active blockchain and broadcast to any additional nodes who are participating.
The addition of more computers, sometimes known as nodes, to the blockchain increases both its stability and its level of security. As of the latter part of August 2022, it was believed that there were 15,169 nodes operating Bitcoin’s code.
Even though anyone can join the Bitcoin network as a node as long as they have the storage space to download the whole blockchain as well as its history of transactions, not all of the nodes are miners.
What exactly does “Bitcoin Halving” mean?
The block reward that is paid to Bitcoin miners for their work in processing transactions is halved for every 210,000 blocks that are mined, which is roughly equivalent to once every four years. Because of this occurrence, the rate at which new bitcoins are issued into circulation is going to be slashed in half, and so the event is known as “halving.” This is the method that Bitcoin uses to artificially inflate prices until all bitcoins are put into circulation.
This rewards system will continue until the projected limit of 21 million coins is reached, which is expected to occur somewhere around the year 2140. When this occurs, miners will be rewarded with fees for the processing of transactions. These costs will be paid for by users of the network. Because of these fees, miners will continue to have the motivation to mine, which is necessary to keep the network operational.
The halving event is substantial because it marks some other drop in the rate at which new Bitcoins are being generated as it approaches its finite amount: the maximum total stock of bitcoins is 21 million.
The halving event is substantial because it traces another drop in the rate at which new Bitcoins are being produced. Late in August 2022, there were approximately 19.1 million bitcoins already in circulation, which meant that only approximately 1.9 million remained to be distributed as prizes for mining.
In 2009, the incentive for mining a block throughout the chain was fifty bitcoins. This remained the same in 2010. Following the initial halving, there were 25, then 12.5 bitcoins per block, and finally, on May 11, 2020, there will be 6.25 bitcoins for each block.
To put this into perspective with anything else, think about what would happen if every four years the amount of gold extracted from the ground was cut in half. If the value of gold is determined by how scarce it is, then “halving” the amount of gold that is mined every four years should, in theory, cause the price of gold to rise.
What Effects Does a Bitcoin Halving Have?
Since a Bitcoin halving is a momentous event, it has a substantial impact on the many parties that are participating in Bitcoin’s network. The following is a condensed explanation of how the halving of Bitcoin’s supply impacts the most important stakeholders and talking points in the network.
Investors: As a general rule, halving causes increasing prices for the cryptocurrency because of reduced supply and mounting points, which is excellent news for investors because it means prices will continue to rise. In preparation for the halving, there is a rise in the volume of trading activity on the blockchain of the cryptocurrency.
As was shown earlier, the logistics and circumstances of each price halving have a direct bearing on the pace at which prices grow. Consequently, the pace at which prices increase might vary.
Miners: The reduction in the number of bitcoins in circulation is a negative factor for miners. This occurs as the total supply of Bitcoin decreases, which means that the halving will reduce rewards for processing transactions.
As a result, miners might incur losses through the halving event, especially if they are not prepared to invest. The price of Bitcoin may be at its peak or it might even plunge due to this reduction. Miners will have to contend with both of these possibilities because of the drastic effect that the halving has on their business. Ultimately, the value of Bitcoin will be determined by its price for other cryptocurrencies and fiat currencies, as well as its success as a payment method.
To adapt to this new environment and maintain profitability, miners can make investments in additional mining hardware (script ASICs and GPUs) or relocate their operations overseas to countries like China, where electricity is cheap.
Bitcoin’s supply limit
Before we can get a handle on the halving of Bitcoin’s supply, we need to have a firm grasp on the theory behind it.
Satoshi Nakamoto, the person who came up with the idea for Bitcoin, believed that scarcity may generate value in situations where there was none before. After all, there is only one Mona Lisa, only a certain number of Picassos, and only a finite amount of wealth on the planet.
Bitcoin was a game-changer in that it made it possible, for the first time, to make a digital good scarce. There will never be more than 21 million Bitcoin in circulation.
The operation of fiat currencies like the United States dollar is fundamentally incompatible with the concept of putting supply controls on Bitcoin. Initial laws for the creation of fiat currencies were very strict. For example, for the United States government to issue one dollar, they needed to have a particular amount of gold in reserve. This was the benchmark that everyone measured up to.
With time, these rules became less stringent as economies continued to modernize and as governments, in response to prolonged periods of extreme financial uncertainty (such as the Great Depression and World War II), printed more money to assist in the stimulation of weakening economies. Throughout history, these regulations morphed into the current system, which allows governments to (generally speaking) issue money whenever they see fit.
Because Satoshi Nakamoto feared that the devaluation of fiat currency may have terrible implications, he used code to prohibit any one entity from being able to issue more bitcoin. This ensured that the supply of bitcoin would remain stable.
Conclusion: The supply of Bitcoin must remain stable.
Bitcoin’s funds are stored in a matching system on the blockchain. For every block mined, 50 BTC is added to the store of addresses that have provided funds for that transaction. This means that when a transaction is processed, 50 BTC is sent to the miner who mined the block, and another 50 BTC will be used to pay for space on the block and fees associated with the transaction.
When a miner gets paid, he sends this extra amount back to those who provided it originally. The result is that each block mined yields a net of 25 BTC that is not available to the rest of the network.
It is important to note, however, that miners are not in the business of returning the money they are paid. Miners expect to make profits by using their hardware and electricity to mine new Bitcoin and get paid for doing so. Consequently, they have a vested interest in making sure there is still new Bitcoin left to be found when it comes time for them to get paid again.
Read Also –
What Is Wrapped Bitcoin (WBTC)? A Beginner’s Guide
What Are The Different Types Of Bitcoin Nodes? How Is The Bitcoin Network Maintained?
What Is ‘The Merge’? Ethereum’s Move To Proof Of Stake