Bitcoin Network and the Halving
Since the creation of the Bitcoin network, miners' rewards have been halved every four years. Bitcoin halving, also known as halvening, is the process of halving the value of a bitcoin. A total of three halvings have occurred to date. The most recent was in May of 2020, when block rewards were reduced to 6.25 BTC. But, before you try to figure out what Bitcoin halving means, let me give you a quick overview of how the Bitcoin network works.
How the Bitcoin network works
Even though the Bitcoin network is complicated, it's simple to understand if you understand how mining works.
First, the Bitcoin network will only ever generate a finite number of bitcoins. Just 21,000,000 bitcoins will ever be mined (though this does not guarantee that there will be that many in circulation; some Bitcoins have been lost forever due to owners misplacing their private keys).
Miners play a crucial role in unlocking these bitcoins in the network. Bitcoin miners are still up against the clock, attempting to solve complex mathematical puzzles. Miners use sophisticated equipment to validate transactions on the Bitcoin network, which necessitates a continuous and heavy consumption of raw electricity. This is known as proof-of-work in technical terms. The key to verifying the next Bitcoin transaction can be found in these puzzles. The network algorithmically rewards miners with a certain number of Bitcoins called coinbase rewards for this exercise.
The Bitcoins provided as incentives are applied to the total circulating stock, which is also how new Bitcoins are produced and added into circulation.
What is Bitcoin halving?
Once every ten minutes, transactions are verified and included in a block (a collection of files related to the Bitcoin network). A reward is provided to a node in the Bitcoin network for validating a transaction that is added to a block. Every four years, this award is cut in half.
One of the most noticeable discrepancies between the Bitcoin network and the fiat currency system is the cryptocurrency's restricted supply. To monitor the issuance of new Bitcoins through the mining process, Satoshi hardcoded halving into the Bitcoin network. The advantages of this are that it allows you to monitor how much of the supply becomes available over time, lowering inflation.
Miners' incentives were decreased from 12.5 Bitcoins to 6.25 Bitcoins in the most recent halving, which occurred in May 2020.
Halving schedules
We previously identified that halving occurs every four years on average. This ensures that every four years, Bitcoin's inflation rate and the rate at which new Bitcoins reach circulation are cut in half. As you can see, despite the fact that Bitcoin is widely regarded as an extremely volatile commodity, the currency's supply remains stable. There is a target date for when the entire stock of BTC will be distributed, but it is still a century away.
2009: Bitcoin reward - 50 BTC
2012: Bitcoin reward - 25 BTC
2016: Bitcoin reward - 12.5 BTC
2020: Bitcoin reward - 6.25 BT
Out of the estimated supply of 21,000,000 Bitcoins, 18,663,712 are currently in circulation. That means that miners have created roughly 89 percent of all Bitcoins that will ever exist.
The 64th halving of the Bitcoin network will take place about 2140, at the current halving pace (one halving for every 210,000 blocks mined). Miners can only be paid from transaction fees after that, as coinbase incentives will no longer be available.
The halving’s effect on the price of Bitcoin
During Bitcoin's halving case, there is a lot of speculation. Bitcoin's price continues to increase after halving cases, according to a historical analysis of the last three halvings.
To put it in perspective, the first-ever Bitcoin halving occurred in November 2012. Bitcoin's price rose from about $12 to nearly $1,150 in a year as a result of this incident. In July of 2016, the next halving took place. And, as with the previous halving, Bitcoin's price rose from $650 to $20,000 in less than a year and a half, by December 2017.
When it comes to Bitcoin halving and price appreciation, many analysts contend that correlation is not causation. Bitcoin's price has risen from $8,672 in May 2020 to over $61,000 in March 2021 after the last halving. In the past, the price of Bitcoin has tended to rise following the halving case.
As the incentives are halved, the inflation rate is reduced, resulting in higher prices. Following the halving, the price appreciation aids in motivating miners who invest considerable computing power to keep their nodes going.
But, what if a halving did not result in a price increase for Bitcoin? Isn't this going to make miners lose interest in running their nodes? That isn't always the case.
The Bitcoin network has a built-in governing mechanism that adjusts the difficulty level of the cryptographic puzzles that must be solved automatically. Block confirmation time tends to decrease as more nodes enter the network, taking with them their additional computing resources. However, since miners' difficulty levels change to hold block confirmations within the ten-minute range, this does not always happen.
The next halvings
Bitcoin halvings occur every four years, with the most recent one occurring in May 2020. The following halving activities will take place in 2024, 2028, 2032, and 2036, respectively.
When the 840,000th block is mined in 2024, the block reward will be reduced to 3.125 BTC. By then, 96.8% of Bitcoin's total supply would have been mined, leaving 656,250 BTC to be mined. Following that, the fifth and sixth halvings would limit block rewards to 3.125 and 1.5625 BTC, respectively. Miners can continue to win block incentives and transaction fees until the last halving in 2140.
The future
On the issue of Bitcoin halving, the supply and demand theory holds sway. Since halving would continue indefinitely, Bitcoin's demand will rise, necessitating price inflation due to a restricted supply.
Consider what would happen if the amount of gold that could be mined was limited every four years. What do you think would happen to its demand if this happens? People will fight for a piece of it! Nations also have gold in their reserve reserves to protect themselves from hyperinflation and other severe economic disasters. If the halving continues, this is the most likely scenario for Bitcoin.
Microstrategy, Square, and, most recently, Tesla are all investing heavily in Bitcoin. They may be said to be expecting potential increases in the value of "digital gold." Tesla has begun accepting Bitcoin as a payment option for its car sales, especially under the mercurial leadership of Elon Musk. The fact that Tesla has set up its full node as it begins accepting Bitcoin as a payment method for its goods is perhaps the most exciting aspect of the Bitcoin adoption story. It also stated that it would not turn Bitcoin proceeds from car sales into fiat currency, but will instead hodl.
So you mean, every halving means, the bitcoin that is produced through mining is reduced?