What is Bitcoin Halving?

Before getting to what is bitcoin halving lets see how the bitcoin network operates.

The base of bitcoin’s technology is blockchain, it is a cluster of computers, or nodes that run bitcoin’s software and contain some part or the total history of the transactions that have taken place on its network. Every full node containing the total history of the transactions on bitcoin, is incharge for approving or rejecting a transaction in the network. To perform this the node supervises a sequence of checks to see if the transaction is valid or not. These checks include to make sure that the transaction contains the exact validation parameters, like nonces, and do not exceed the required length.

For a transaction to happen only after the groups operating in Bitcoin’s network approve it the block that the transaction exists in. The transaction is added to the existing blockchain and send or broadcast to other nodes. The contents in the blockchain are available and visible to everyone but it is tough to figure out the transacting parties in the network. As the blockchain assigns encrypted addresses to each transaction in the network. Even the users and miners who do not participate in the network as a node can see the transaction taking place live by looking into the block explorers.

The security and the stability get stronger when more nodes are added to the blockchain network. There are approximately around 10,000 nodes currently which seem to run Bitcoin’s code. As long as you have enough storage to the entire blockchain and its history of transactions anyone can participate in the Bitcoin’s network as a node.

After learning about how the bitcoin network works now let us see what is bitcoin mining

Bitcoin Mining

It is a process where new bitcoins are entered into circulation, but it is also citracal component of the maintenance and development of the blockchain ledger. It is performed using very sophisticated computers that solve extremely complex computational math problems. The miner must prove that they have worked on it in processing the transactions to be rewarded which is called Proof of Work.

Faster computers with high end hardware yield larger block rewards and there are come companies who have designed computer chips built for mining.

Transactions which are of higher value require more confirmations to ensure security. The work done here is to get new bitcoin equivalent to the work done to pull gold out of a mine.

Bitcoin Halving

The latest halving occurred in May 2020, upon the completion of 630,000 blocks (the third set of 210,000 blocks), and the reward is now 6.25BTC per block. It takes roughly four years for 210,000 blocks to be mined. Consequently, bitcoin halving usually occurs in four-year intervals. The block given to miners for processing transactions is cut in half. This reduces the rate at which the new bitcoin is added to circulation in half.

This is bitcoin’s method of using a synthetic form of inflation that halves every four years until all bitcoin is released and is in circulation.

This system will continue till the year 2140, at that point, miners will be rewarded with fees for processing transactions that network users will pay. These fees ensure that miners still have the incentive to mine and keep the network going. These fees will cause them to remain low after halvings are finished.

Halving is notable because it marks another drop in Bitcoin’s shrink finite supply. There are around 18,705,825 bitcoins in circulation and 2,638,562 left for release after mining through rewards.

Halving has ramifications

The halving reduces the rate at which new coins are created and lower the current available supply. This can lead to some consequences for the investors as other assets with low supply, like gold, can have high demand and push prices higher.

Previously bitcoins halving have resulted in big raises in the bitcoin price. November 2012 saw the first halving which resulted in the increase of the price from $12 to nearly $1,150 in a year. The second halving happened in July 2016. The price at that halving was about $650 and December 17th, 2017, Bitcoin’s price had soared to nearly $20,000. The price went down in years from this peak to around $3,200, a price nearly 400% higher than its pre-halving price.

In 2009, the reward for each block in the chain mined was 50 bitcoins. It was 25 after the first halving, then 12.5 and it became 6.25 bitcoins per block as of May 11th, 2020. Now imaging if the amount of gold mined out of the earth was cut in half every four years. If gold’s value is based on its scarcity, then a “halving” of gold output every four years would theoretically drive its price higher.

If the halving does not increase demand and price, then miners would have no reward for completing transactions would be smaller and the value of the bitcoin would not be high enough. To avoid this the bitcoin has a process to change the difficulty to get mining rewards. The quantity of bitcoin released as a reward is still smaller but the difficulty of processing a transaction is reduced.

The process is successful and also has been to be proven twice. The results of these halvings have been inflating the price followed by a large drop.Crashes that have followed these gains have still maintained prices higher than before these halving events. For instance the example above the 2017-2018 bubble saw bitcoin rise to around $20,000 only to fall to around $3,200. This is a massive drop but bitcoin’s price before the halving was around $650. While this system has worked up to this point, it is unpredictable as to how the market will react to these events in the future.

Now let clear the cloud with some common questions asked.

Why are the halving occurring less than every 4 years?

The bitcoin algorithm is set with a target of finding new blocks once every ten minutes. But, if more miners join the network and add more hashing power, the time to find blocks will decrease. This is cured by resetting the mining difficulty for a computer to solve the mining algorithm once every two weeks or to restore a 10 minute target. The bitcoin network has grown exponentially over the past 10 years; the average time to find a block has consistently been below 10 minutes .

What do you mean that Bitcoin halves?

The word “halving” means how many bitcoin tokens are found in a newly created block.

In 2009 when bitcoin launched, each block contained 50 BTC, but this amount was set to reduce by 50% roughly every 4 years. Today there have been 3 halving events and a block only contains 6.25 BTC. When the next halving occurs, a block will only contain 3.125 BTC

What happens when there are no more bitcoins left in a block?

In the year 2140, the last 21 million bitcoin will be mined. Halving bitcoin at this time will come to an end as there will be no bitcoins left. Miners will be able to get incentives and continue validating and verify new transactions on the blockchain. As the value of the transaction fees paid to the miners is thought to rise into the future. The greater transaction volume that has fees attached, plus a greater nominal market value of bitcoins.