What is a Bitcoin Halving?
✂️ The beginner’s guide to halvings
A Bitcoin halving is an event that automatically reduces the number of new bitcoin (BTC) units that enter into circulation over time via the crypto mining process.
This process takes place approximately once every four years and progressively cuts the issuance rate of newly-minted bitcoin by 50% each time.
Unlike traditional fiat currencies, where centralized authorities can adjust the monetary supply at will, Bitcoin has a truly finite maximum supply and a fully transparent, programmatically-controlled issuance schedule.
This has led some people to regard bitcoin (BTC) as a potential store of value asset, particularly in regions where government-issued currencies have collapsed.
Once the protocol hits this number, no more bitcoin can be mined.
🧑🏫 Bitcoin halvings explained
Bitcoin’s clearly defined and fixed inflation rate is what separates Bitcoin from government issued currencies.
While governments constantly adjust their inflation rate to account for economic factors, Bitcoin operates in an unchangeable way.
Satoshi Nakamoto, the project's pseudonymous creator and author of the Bitcoin white paper, programmed halvings into the protocol prior to its launch in 2009.
🧐 How is bitcoin different from “normal” money?
To best understand halvings, it's helpful to first understand how bitcoin is different to government-issued currencies like the U.S. dollar.
The monetary policies that govern government-issued national currencies are subject to change based on the discretion of a central authority. These are often a country's central bank or government. Monetary policy is the way by which a central bank controls the amount of money that exists within the economy.
Using monetary policy, governments can modify their money supply by creating units of currency as they see fit. To avoid defaulting on their debts, governments have often chosen to increase their money supply. Increasing the money supply allows governments to use newly created currency to fulfill their past debt obligations.
The process of creating new units of currency (increasing the money supply) is said to debase the currency. Debasement refers to a reduction in the amount of goods people can purchase with each unit of currency. In economics, this concept of how many goods can be purchased for a unit of currency is known as purchasing power.
Creating many new currency units and releasing them into circulation can also drive inflation. Inflation is an increase in the prices of goods and services across an economy.
So, how is bitcoin different?
Unlike fiat currencies, bitcoin is a fully decentralized and programmatically controlled financial protocol. No single government, central bank, or crypto holder can override the rules of bitcoin or decide for themselves how the protocol should operate.
New units of bitcoin are issued based on a fixed schedule that Bitcoin's anonymous creator, Satoshi Nakamoto, programmed into the protocol when it first launched.
These rules are hard-coded into bitcoin's source code and can only be changed with a majority consensus from all nodes on the network.
📝 How do bitcoin halvings work?
Because Bitcoin is a decentralized and programmatically-controlled financial protocol, bitcoin halvings take place automatically via a computer program.
No single government, central bank or crypto holder can override Bitcoin’s computer-coded rules. Nor can they decide for themselves how the Bitcoin protocol should operate.
Satoshi crafted the rules of the halving mechanism to ensure Bitcoin's long-term feasibility and functionality. This choice ultimately left Bitcoin’s rules open for the community to change as they see fit, yet halvings have remained.
Because all proposed changes must receive consensus from all participants in the global Bitcoin network, changes rarely happen. In short, everyone’s generally happy with how the system works.
Currently, halvings events follow a strict set of parameters that have not changed since Satoshi first created them.
Halvings occur after every 210,000 blocks of transactions. It takes approximately four years to reach this amount of transactions.
The Bitcoin protocol automatically reduces the amount of newly-minted bitcoin distributed to winning miners as a block reward by 50%. Miners receive half as much block reward for the next halving cycle as they did from the previous 210,000 blocks.
Halving will continue until the circulating supply of BTC reaches the maximum supply limit of 21 million.
Once the number of bitcoin in circulation hits 21 million, the Bitcoin protocol will stop issuing new units in subsequent block rewards.
This moment is expected to take place some time near the year 2140.
After this time, miners will likely be forced to subsist on transaction fees alone for processing bitcoin payments.
📊 How do halvings affect bitcoin’s price?
Looking back at historical price movements, dramatic price increases have followed after each halving event.
Halving #1: 9,520% rise over the following 365 days.
Halving #2: 3,402% rise over the following 518 days.
Halving #3: 652% rise over the following 335 days.
From this, the mean average time before prices peak after a halving is around 406 days.
Of course, past performance is no guarantee of future results, and while many believe halvings are the fundamental catalysts for these rallies we cannot know definitively if this is the case.
⏳ How many bitcoin halvings are left?
Of the 21 million bitcoin that will ever exist, just under 20 million are already in circulation.
It has been frequently estimated that the last bitcoin will enter into circulation in the year 2140.
If that is correct, it means that there should theoretically be at least 29 more halving events between now and then.
🔮 What happens when there's no more bitcoin left to mine?
It's impossible to know with any certainty how the Bitcoin market will look in over a hundred years' time.
It's possible that protocol optimizations and new functionality may allow miners to survive comfortably on bitcoin transaction fees alone in the future. We have already seen how innovations such as Ordinals have caused BTC transaction fees to spike, allowing miners to earn more revenue from the blocks they discover.
Alternatively, humans may have discovered limitless clean energy by then and found new hyper-efficient ways to mine bitcoin with near-zero running costs. Only time will tell.
🔑 Why are bitcoin halvings important?
Nakamoto implemented halvings on the Bitcoin network to control the inflation rate of its native cryptocurrency. Other digital currencies that have hard forked from Bitcoin such as Litecoin (LTC) continue to use this mechanism in their protocols also.
The Bitcoin halving process is completely different from the rate at which government-issued currency enters into circulation.
In fiat economies, supplies can dramatically increase (or decrease) at a moment's notice based on the decision of a central bank. In these instances, millions of new units of a currency may enter (or exit) the market whenever policy makers deem it necessary.
Bitcoin simply does not have the functionality to allow a single entity to change its issuance system.
Because of this, many see bitcoin as a more resilient, transparent and reliable form of money.
In addition, many argue that halvings have a positive effect on bitcoin's price dynamics. Based on the economic principle of supply and demand, halvings have the effect of shrinking the available supply of new bitcoin entering the market over time. Provided there is steady demand for the crypto asset, this mechanism may help to support future prices.
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Halvings represent one of bitcoin’s most exciting and innovative features.
Not only have they seemed to have repeated positive impacts on its market price, but their predictability and transparency are key factors that distinguish bitcoin from fiat currencies and all other types of assets.
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