What you need to know about the Bitcoin halving

What is the Bitcoin halving?

The Bitcoin halving, which occurs every four years, is an event where the fixed rewards (new Bitcoins) for Bitcoin mining are cut in half. This mechanism is a central element in Bitcoin’s economic model, controlling and slowing the rate at which new Bitcoins enter the market. It ensures a steady, disinflationary trend, thereby creating scarcity and giving Bitcoin its store of value properties.

Through Bitcoin’s proof-of-work (PoW) mechanism, miners are responsible for producing new blocks and are rewarded with new coins for their use of heavy computational resources.

History of the Bitcoin halving

Since Bitcoin’s launch, there have been three halving events:

• 2012 halving: On November 28 2012, the fixed rewards were reduced from 50 to 25 Bitcoins
• 2016 halving: On July 9 2016, the fixed rewards were reduced from 25 to 12.5 Bitcoins
• 2020 halving: On May 11 2020, the fixed rewards were reduced from 12.5 to 6.25 Bitcoins

The next halving will happen in late April 2024, and will reduce block rewards for the fourth time from 6.25 to 3.125 Bitcoins. This process will continue until all 21 million Bitcoins have been mined. As miners earn the majority of their revenue from the fixed rewards, there will be a steady transition from fixed rewards to transaction fees with each new halving event.

Importance of the Bitcoin halving

Bitcoin’s store of value : Halvings are hardcoded into Bitcoin’s protocol, creating predictable scarcity and giving Bitcoin its store of value properties. This scarcity effect strengthens Bitcoin’s appeal as a safe haven asset and a hedge against inflation and economy instability.

Efficiency and innovation: Halving events may be challenging for many miners, they ensure the network is consistently maintained by those committed to long-term sustainability. This will continue to drive innovation, making use of alternative and excess energy sources and the latest hardware, while gradually shifting towards transaction fees as a major source of revenue – a change anticipated with future halvings.

Impact of the Bitcoin halving

Impact on miners: The halving affects the profitability of mining operations, as they may face reduced earnings when block rewards are cut in half. Many miners are relying on a Bitcoin rally to stay afloat, but they will also need to find innovative ways to keep their costs low, explore alternative revenue streams, or optimise their computing power capacity in order to stay afloat.

Impact on supply: With its supply capped at 21 million coins, halving events serve as an orderly mechanism to lower Bitcoin’s inflation rate. As the fixed rewards for mining decrease, the rate at which new coins entering the market also decline, potentially creating a supply shock, as the demand for Bitcoin may continue to grow while the supply increases at a slower pace.

Impact on price: Historically, halving events have been linked with substantial increase in Bitcoin’s price. However, it is worth noting that Bitcoin’s growth is determined by many market drivers, including protocol innovations, institutional-backed spot ETFs and regulatory developments. The scarcity effect however, can potentially exert upward pressure on prices if the demand for Bitcoin increases over time.