Understand the Impact of Bitcoin Halving

What Is Bitcoin Halving?

The Bitcoin Halving is when Bitcoin's mining reward is divided in half. It takes the blockchain network about four years to open 210,000 more blocks, a standard established by the blockchain's creators to continually reduce the rate at which the cryptocurrency is introduced.

The first reward was 50 bitcoin. Previous halving dates were

• Nov. 28, 2012, to 25 bitcoins

• July 9, 2016, to 12.5 bitcoins

• May 11, 2020, to 6.25 bitcoins

• April 19, 2024, to 3.125 bitcoins

The next halving is expected to occur in 2028, when the block reward will decline to 1.625 BTC.

As of April 2024, about 19.69 million bitcoins were in circulation, leaving just around 1.31 million to be released via mining rewards.

Basics of the Bitcoin Network

To comprehend a Bitcoin halving, you must first know how the Bitcoin network operates.

Bitcoin's underlying technology, blockchain, consists of a network of computers (called nodes) that execute Bitcoin's software and contain a partial or complete history of transactions occurring on its network. Each full node contains the entire history of transactions on Bitcoin and is responsible for authorizing or rejecting a transaction in Bitcoin's network. To do that, the node conducts a check to guarantee the transaction is legitimate. These include ensuring the transaction contains the correct validation parameters and does not exceed the requisite length.

Each transaction is authorized individually. This is said to occur only after all the transactions encoded in a block are approved. After approval, the transaction is appended to the existing blockchain and broadcast to other nodes.

Adding more devices (or nodes) to the blockchain increases its stability and security. There were 19,329 nodes estimated to be executing Bitcoin's code on April 19, 2024. Although anyone can participate in Bitcoin's network as a node as long as they have enough storage to obtain the entire blockchain and its history of transactions, not all of them are miners.

Basics of Bitcoin Mining

Bitcoin mining is the process by which individuals use computers or mining hardware to partake in Bitcoin's blockchain network as transaction processors and validators. Miners receive rewards and transaction fees.

Bitcoin employs a system called proof-of-work (PoW) to validate transaction information. It's termed proof-of-work because solving the cryptographic conundrum takes time and energy, which functions as proof that work was done.

The term mining is not used literally but as a reference to how precious metals are harvested. When a block is full with transactions, it is closed and sent to a mining queue. Once it is queued up for verification, Bitcoin miners compete to be the first to discover a number with a value less than that of an objective set by the network. The hash is a hexadecimal number that comprises all of the encrypted information of the preceding segments.

Mining confirms the legitimacy of the transactions in a block and opens a new one. Nodes then validate the transactions further in a series of confirmations. This procedure creates a chain of nodes comprising information, establishing the blockchain.

Bitcoin Halving Effects

Inflation

One of the primary concepts behind halving the reward is to resolve inflation concerns. Inflation is a decrease in the quantity of products a certain amount of currency can purchase at any given moment. In the U.S., inflation is measured by how much it costs to purchase a bundle of products. There is a tolerable inflation rate that is considered beneficial for an economy—usually 2%—but this number is generally a target set by central banks as an objective rather than a reachable figure.

The Bitcoin Halving is intended to mitigate any inflationary effects on Bitcoin by lowering the reward amount and maintaining scarcity. However, this inflation "protection" mechanism does not shield Bitcoin consumers from the inflationary effects of the fiat currency to which it must be converted to be used in an economy.

Gains made regarding market value might offer inflation protection for investors, but it doesn't for the cryptocurrency's intended use as a payment method.

Demand

Because a halving reduces the number of new Bitcoins introduced, demand for new Bitcoins generally increases. This can be noted by looking at Bitcoin's price after each previous halving event—it has generally risen.

Investing

Bitcoin wasn't intended to be an investment. It was introduced as a payment method that attempted to eliminate the need to have regulatory agencies or third parties involved in transactions.

It became popular with investors once it was noted that there was the potential for gains. Investors flooded into the new asset space, generating demand that the cryptocurrency's designers may not have anticipated. For investors, a halving represents a reduction in the new coin supply, but it also offers the prospect of an increase in investment value if the event's effects remain the same. But this positions Bitcoin investing into the domain of speculation because those invested in the cryptocurrency are expecting for gains.

Mining

Miners are the individuals, organizations, or enterprises that focus on mining for its profitability. When new Bitcoins are awarded, the miner(s) that receive the reward have been making substantial gains in the past. As Bitcoin's price fluctuated over the years, it remained a lucrative endeavor—if it hadn't, the major mining businesses wouldn't have continued operating.

However, a halving reduces mining rewards, so the endeavor becomes less profitable with each halving if prices remain the same or decline. The large-scale mining facilities required to remain competitive require tremendous quantities of money and energy. The equipment and facilities need maintenance and personnel to conduct it. They also need to enhance their mining capacity to maintain their position in the industry.

For instance, Marathon Digital Holdings, one of the world's largest mining firms, increased its Bitcoin holdings to 16,930 and its fleet of Bitcoin miners to 231,000 in February 2024. This raises the firm's hash rate to 28.7 trillion hashes per second (about 5% of the network's total hash rate as of April 19, 2024).

The increase in production capacity and holdings was likely due to anticipations of the April 2024 halving and the amount of hashing power required to remain competitive while having the liquidity necessary to finance its operations.

For lesser miners, a decrease in the reward implies decreased possibilities. Miners who are part of a mining pool will likely experience reduced rewards, even if prices increase—the reward is being cut in half, but Bitcoin's price is not likely to double to maintain current profitability unless there is a drastic market event.

Consumers

Consumers and retail Bitcoin consumers might be affected by a halving in the value of the Bitcoin they possess. Those who acquire Bitcoin for making purchases will generally only be affected by price fluctuations, which may or may not remain similar to those before the halving occurred.

For those using Bitcoin for remittances, a halving signifies the same thing as it does for consumers. The value of their remittances will hinge on Bitcoin's market price after the halving event.

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What Happens When Bitcoin Halves?

The expression "halving" as it relates to Bitcoin concerns how many tokens are rewarded. This functions as a means to simulate diminishing returns, theoretically intended to raise demand.

Why Are the Halvings Occurring Less Than Every 4 Years?

The Bitcoin mining algorithm is set with a target of discovering new blocks once every 10 minutes. Some segments require more than 10 minutes; some take less. This can decrease or increase the quantity of time it takes to attain the next halving objective. For example, if blocks consecutively average 9.66 minutes to mine, it would take about 1,409 days to mine the 210,000 blocks required (four years is 1461 days, including one day for a leap year).

What Happens When There Are No More Bitcoins Left?

It is often believed that in 2140, the last bitcoin will be extracted. However, if the incentive is halved every 210,000 blocks, it will get smaller and smaller until one satoshi is the reward and the total amount circulating equals 21 million. One satoshi is 0.00000001 bitcoin—it is the lowest denomination of Bitcoin and cannot be divided.