Bitcoin may not be new to you, especially if cryptocurrencies interest you. One way to own a Bitcoin is to mine it. In a nutshell, Bitcoin is a block reward given to miners after they finish verifying a transaction in a block through computational work. The mining might sound too easy, but it requires ample money, time, and energy to deal with technical and complex questions.
Satoshi Nakamoto, the founder of Bitcoin, initially set up Bitcoin’s protocol with a supply that is only limited to 21 million. The reward for generating bitcoins decreases by 50% every after 210,000 blocks, roughly around four years. This is called Bitcoin halving.
Bitcoin halving is not rocket science but just simply refers to a process in which Bitcoin is cut in half. This price of the Bitcoin, when split, will depend upon its current price at the time of halving.
For instance, if miners currently receive 6.25 Bitcoin after solving a block, the amount they will receive the next halving will only be 3.125 and so forth. You need to consider cases like lost Bitcoins that were not and can never be recovered.
The most recent Bitcoin halving occurred last the 11th of May 2020.
Purpose of Bitcoin Halving
What’s the purpose of cutting bitcoins in half? Why is there a need for change? Why didn’t Satoshi keep the reward the same?
The answer is quite simple, lying with the law of supply and demand.
If bitcoins would be created too fast, or if there will be no limit to the number of Bitcoins that can be produced, there will eventually be a great number of bitcoins in circulation, making its value fall significantly.
The forefront developer of Ethereum, Vitalik Buterin, created an op-ed page for Bitcoin Magazine, explaining the call to slow down the distribution of Bitcoin through halving.
Buterin stated that the very reason why halving is done is to maintain inflation under control. The problem with currencies controlled by central banks is their ability to print as much money they want. If there’s immoderate money in circulation, the law of supply and demand guarantees that the value of the currency will start dropping.
On the other hand, Bitcoin is like gold designed to simulate a certain commodity. With the limited amount of gold in the world, and with every gram that is mined, the gold becomes harder and harder to bring out. As an effect of this scarcity, gold kept its merit as an international method of exchange and retained its purchasing power for about 6,000 years. Bitcoin hopes to follow the same path.
Bitcoin halving is important because it points to another drop in bitcoin’s decreasing finite supply. Given that the total maximal supply of Bitcoin is 21 million— and there are approximately 18,715,050 million bitcoins in circulation as of May 2021, the bitcoins that are yet to be released through mining rewards will be just 2,284,950.
Back in 2009, the reward for every block in a chain was about 50 bitcoins. Upon the first halving, it became 25, then later became 12.5, and 6.25 as of May 2020. Imagine if the number of gold mined out was split in half every four years. Theoretically, “halving” of gold will make its price higher if people base a gold value on scarcity.
Halving fulfills the main objective of lowering available supply, minimizing inflation rate, increasing bitcoin demand and its price, making Bitcoin a widely recognized asset as of today.
Effects on Bitcoin’s Price
It is a big question to everyone how halving would affect Bitcoin’s price. Still, none is yet to answer that question.
On the first Bitcoin halving that took place on the 28th of November 2012, Bitcoin was at $13.43, and halving didn’t appear to affect the price that much.
Later, after the halving event in 2016, nothing much happened to Bitcoin and the US dollar exchange rate. At the time of the event, Bitcoin was playing their game at the US $650 and became the US $675 after a week. There’s quite a change, but not much.
There are still arguments given for the two scenarios. Perhaps, either nothing will change after halving, or the price will rise.
Some claim that halving would not surprise anyone in the Bitcoin community as it doesn’t really cause a major change in Bitcoin’s price. On the flip side, others think there will be a hike in price as the demand increases due to the scarce Bitcoin supply.
Nevertheless, there seems to be no one to think that Bitcoin’s cost may decrease due to the halving.
Why Halving Only Occurs Every 4 Years?
The halving takes place every four years due to Bitcoin’s algorithm, which depicts the creation of a new Bitcoin block every 10 minutes. This fixed bitcoin creation interval takes approximately four years to reach 210,000 blocks required to initiate a halving.
However, if there will be more miners join the network, there will be more hashing power, and the time allotted to find blocks will be reduced. This is sort outed by resetting the complexity of mining to restore the 10-minute target.
Along with Bitcoin’s considerable growth over the past years, the fixed time interval dropped below 10 minutes, roughly around 9.5 minutes.
Will Bitcoin Mining End?
Around 2140, the last of the 21 million bitcoins will be mined. From that year forward, there will be no Bitcoins that will be mined. But, although the last piece of Bitcoin is mined, miners can still earn continuously.
The miners will earn through incentives by confirming and validating new transactions within the blockchain. The incentive given to miners is said to rise in the time ahead. There will be greater transaction volume that has fees required, along with the official market value of Bitcoins.
Conclusion
Bitcoin was designed to be a good asset, and for this, specific rules were set.
There will only be a specific quantity of Bitcoin — 21 million — and inflation remains in check through the slow distribution of coins via halving. Halving is an important feature that maintains the good value of Bitcoins.
You might also want to read: How to Buy Bitcoin
