Bitcoin Halving Explained

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Bitcoin Halving Explained

Summary
  • Bitcoin halving is an integral part of the reason why Bitcoin has been a successful cryptocurrency.
  • It is a protocol that has been implemented to happen on the Bitcoin blockchain every 4 years to make its value inherently deflationary and self-regulate its inflation rate.  
  • Halving corelates directly with the work Bitcoin miners do as every halving event reduces the rewards they can redeem on the Bitcoin blockchain.

Table of Contents

Introduction

Bitcoin (BTC) has become so popular, attracting both institutions and individuals seeking to capitalise on its volatility to generate profits. The bitcoin halving event, which occurs once every four years, is one significant factor that makes BTC extra unique and attractive to investors.  

Historically, Bitcoin halving has always had a positive influence on the crypto market, with past halvings leading to a rise in Bitcoin’s price and market capitalisation. Would this always be the case in the future? The answer is still unknown.  

But what exactly is bitcoin halving and why is it important to crypto investors? We answer all your questions in this article.  

What is Bitcoin Halving?

Bitcoin halving is a noteworthy event that happens in the Bitcoin network every four years. The process has been incorporated into the Bitcoin protocol since its creation to control its inflation rate. 

More specifically, it is a method of lowering the incentive paid to bitcoin miners for validating transactions on the network and adding new blocks to the Bitcoin blockchain. Meanwhile, a block refers to a collection of verified and validated transactions that are added to the blockchain.  

This predetermined event strives to keep the quantity of BTC in circulation under control and helps to reduce the rate at which a new Bitcoin is created. In other words, bitcoin halving ensures that BTC is neither oversupplied nor supplied too quickly.  

Unlike fiat currencies (which have unlimited supplies), the total supply of Bitcoin is capped at 21 million. That is, only 21 million BTC tokens will ever be in existence.  

Halving also contributes to the growth of the asset’s value. The first bitcoin halving happened in November 2012 after 210,000 blocks were created.  This resulted in a decrease of the reward given to miners per block created to 25 BTC. Notably, at the start of the Bitcoin network, miners’ reward per block was capped at 50 BTC.  

In July 2016, the second halving event occurred after 420,000 blocks were added to the Bitcoin network. Again, the reward accrued by a miner for validating one block on the Bitcoin network was slashed by half – miners’ reward was reduced from 25 BTC to 12.5 BTC.  

The most recent and third bitcoin halving event occurred in May 2020 after the creation of 630,000 blocks on the largest crypto network. As a result, the reward for validating transactions and adding new blocks to the Bitcoin network was reduced to 6.25 BTC from 12.5 BTC. 

From the foregoing, the fourth bitcoin halving is expected when 840,000 blocks must have been contributed to the Bitcoin network. This block height would be reached in April 2024, leading to a reduction of reward per block mined to 3.125 BTC.  

Bitcoin Halving Timeline

The Impacts of Bitcoin Halving

The halving of Bitcoin is usually followed by a lot of volatility for the cryptocurrency. The halving cycle reduces the amount of available Bitcoin, increasing the value of Bitcoins yet to be mined. These changes present an opportunity for investors to make profits. 

  • The first halving occurred on November 28, 2012, when the price of BTC was at $12.  
    One year later, Bitcoin had soared to over $1,000.  
     
  • The second halving took place on July 9, 2016, and Bitcoin’s price plunged to $670 at the moment but rose to $2.550 by July 2017. Subsequently, Bitcoin hit an all-time high of almost $19,700 in December 2017.  

Notably, the price of BTC was at $8,787 at the time of the third halving event in May 2020. 

However, the asset’s value skyrocketed massively in the months that followed. The halving event plays a critical role in making bitcoin a deflationary asset. The inflation rate of the largest crypto by market capitalisation reduces after every halving event. In 2011, the inflation rate of bitcoin was at 50%.  

But after the first bitcoin halving in 2012, it reduced to 12%. It further declined and stayed between 4-5% in 2016 after the second halving event. At the time of writing, BTC’s inflation rate is about 0.0048%. 

In addition, a considerable association exists between Bitcoin mining difficulty and Bitcoin halving.  

The complexity of the mathematical problems that miners must solve to validate and add transactions to the largest crypto network is known as Bitcoin mining difficulty. It helps to maintain the pace at which a new BTC is mined or brought into circulation.  

What Influences BTC Mining Profitability?

Conclusion

After every 210,000 blocks created on the Bitcoin network, the payout for miners is slashed in half. Regardless of the decrease in block rewards, miners are always encouraged to validate transactions and add them to the blockchain, because Bitcoin halving often results in an increased asset value. 

However, it is important to note that previous effects are not indicative of future outcomes, and Bitcoin investing should always be approached with care. 

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