What Is a Bitcoin Halving?
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- Every 210,000 blocks or roughly 4 years, the amount of new bitcoin miners can mint per block is cut in half.
- From 2009-2013, 50 BTC were minted per block. After 34 halvings, the total supply of Bitcoin will cease growing and rest at just below 21 million BTC.
- Block rewards are critical to incentivizing miners in the early years, but as the block reward shrinks in size, miners will need to draw revenue from transaction fees.
- Miners usually exert sell pressure on the market by selling the block rewards to cover their high operating costs. When these rewards are cut in half, sell pressure may also decrease, yielding a price rise.
The bitcoin supply has a low inflation rate, and this inflation rate trends toward zero. To ensure that the issuance of bitcoin would eventually cease completely, Satoshi Nakamoto encoded a mechanism to halve Bitcoin’s mining reward roughly every four years. Many believe that this mechanism is key to Bitcoin’s value proposition as it ensures that the bitcoin supply will never exceed 21 million bitcoin.
What Are Block Rewards?
Block rewards are the prize miners receive from the network for “finding” the next block in Bitcoin’s blockchain. In brief, mining computers produce “hashes” (long strings of numbers and letters) at an incredible rate of trillions per second to guess the proper hash that will link the previous block in the blockchain, where transactions are stored, with the next block. For their efforts, successful miners receive a block reward in the form of the block subsidy—the new bitcoin that are mined with the new block—along with any fees from the transactions included in the block.
Why Do Miners Get Block Rewards?
Miners receive block rewards, in part, to mint new bitcoin for circulation. Miners typically need to sell the majority of the bitcoin they receive in a block reward to cover electricity and operating costs. Bitcoin mining is very power intensive, and this underlies the other rationale for the block reward: Because miners spend so much money, time and energy to actually extract bitcoin, they are disincentivized from doing anything that might jeopardize their income, such as attacking the network.
When Does a Halving Happen? Is There a Schedule?
Yes, the Bitcoin network is scheduled to undergo its reward halving every 210,000 blocks. Assuming an average block time of 10 minutes, a halving will occur roughly every four years. The third and most recent halving, on May 11, 2020, took Bitcoin’s issuance down from 12.5 BTC to 6.25 BTC every block. Prior to this, the second halving took place on July 9, 2016, reducing the mining reward from 25 BTC to 12.5 BTC. On November 28, 2012, Bitcoin’s initial block reward of 50 BTC was cut in half in the first-ever halving.
Track the countdown to the next halving here.
This process will continue every four years until roughly the year 2140, when the 34th halving will take Bitcoin’s final block reward from 0.00000001 BTC to 0.
Does the Halving Influence Bitcoin’s Price?
This is a matter of heated debate in the Bitcoin community. “Stock-to-flow” (S2F) advocates argue that a reduced inflation rate and the supply squeeze it creates will produce a positive effect on price. Their argument follows that as long as buying demand remains at pre-halving levels, the price should go up because there are half as many new bitcoin entering the open market from miners.
Others do not believe that the halving directly correlates to Bitcoin price increases. Their rationale is that the halving does not create demand in itself, even if it does make the bitcoin supply more scarce over time. Per this argument, just because miners may be selling a reduced number of bitcoin each day does not mean the aggregate selling on the open market will be reduced. Other opponents of the S2F model believe halvings should be priced in because their occurence is public knowledge.
Is Bitcoin Price Correlated with the Credit Cycle?
It is clear that bitcoin tends to increase in price following each halving event, but it is less clear why that is the case. One argument that has been gaining traction is that Bitcoin’s halving coincidentally lines up remarkably well with the phases of expansion and contraction within the credit cycle.
Essentially, this line of reasoning asserts that bitcoin’s price is a function of the liquidity available in the market, hence why bitcoin has been correlated with tech equities, in recent years. Independent market analyst TXMC outlines how bitcoin’s halving events line up with the cycle of the Purchasing Manager’s Index—a metric that measures the month-over-month activity in the manufacturing sector.
Ultimately, it is very difficult to say whether bitcoin’s price action following the halving is a product of the constrained supply of new bitcoin, or a coincidental alignment with the traditional economy, or some mixture of both factors! This will be something to watch carefully as we approach the 2024 halving event.
What Will Happen When the Block Reward Becomes Too Small?
This is also a subject of heated debate. Ultimately, transaction fees will replace the block reward as the primary revenue for miners. Critics argue that this will be economically untenable, but many of Bitcoin’s leading voices say that these fears are overblown. They argue that advancements in transaction batching and other layer-two technologies will likely iterate this problem away.
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