Bitcoin halving is a significant event in the world of cryptocurrency, often surrounded by speculation and anticipation. But what exactly is Bitcoin halving, why does it happen, and does it truly affect Bitcoin's price?
INTRODUCTION
Bitcoin halving is when the rate at which new Bitcoins are created is cut by half.
This event is rooted in the software of Bitcoin, designed by its mysterious creator, Satoshi Nakamoto. Nakamoto programmed Bitcoin's total supply never to exceed 21 million Bitcoins, effectively addressing the issue of inflation rampant in normal fiat currencies. Inflation is fueled by central banks printing more currency, eroding money's value over time.
To help you understand inflation, if you have $1 which could buy you a loaf of bread, but the central banks decide to print more money for whatever reasons, the new notes will flood the market, thereby increasing demand for the price of all goods including bread which by now has increased to $1.2, your $1 can’t buy you the bread again, this is what inflation is, the value of your money has been reduced because more currency notes were printed.
With Bitcoin, scarcity is built into its protocol, ensuring that its value appreciates rather than depreciates over time.
However, since the supply of Bitcoin is limited, the only way to prevent early adopters from hoarding the cryptocurrency is to release it gradually into circulation. Every four years, the rate at which it is being released into circulation is halved.
HOW DOES BITCOIN HALVING WORK?
Bitcoin halving is closely tied to the process of Bitcoin mining. Miners are people who use their computer resources to validate transactions on the Bitcoin blockchain network, and as a reward for their efforts, they receive newly minted Bitcoins.
The reward which is the newly minted Bitcoin has been programmed to be reduced by half every 210,000 blocks, which takes about 4 years because a block is created approximately every 10 minutes, so 210,000 blocks take about four years to complete.
As of 2009, when Bitcoin was first created, it was minted at 50 Bitcoins per block, till the first halving in 2012, when the supply was cut to 25, by the next halving in 2016 the supply was cut to 12.5, the last halving was in 2020 when the supply was further halved to 6.25, the next halving will happen by April of 2024 at block 840,000 and the supply will further be reduced to 3.125.
The rate at which new coins are created will continue to reduce over 64 halvings until the last divisible unit of Bitcoin, which is 1 satoshi = 0.00000001 Bitcoin, is minted at block 13,230,000 in the year 2137. By the year 2140, the very last Bitcoin will have been minted, and there will be no more Bitcoin since only 21 million Bitcoins can be minted.
Since the reward for miners is cut in half every halving, why do miners keep expending computational power and electricity on the Bitcoin blockchain network to process transactions and validate blocks? Also, what will happen to bitcoin miners when the last bitcoin is mined by 2140? When there will be no more mining reward
But first, let's understand the concept of Bitcoin mining
BASICS OF BITCOIN MINING AND MINERS
The Bitcoin cryptocurrency runs on a technology called blockchain, which is a ledger record of all Bitcoin transactions ever carried out since its inception in 2009, this technology is similar to a bank record of transactions but unlike the banking system where control is centralised the blockchain is decentralised
BLOCKCHAIN
To understand blockchain, let's separate the words BLOCK + CHAIN
A block is like a digital box or container that contains a certain number of pending or unconfirmed transactions between users who are sending Bitcoin from one wallet address to another wallet address, the miner computer nodes pick these unconfirmed transactions from the transaction pool or memory pool.
After the block has met the required criteria, the next thing is to append the block to other blocks on the blockchain, it is this process that is called mining.
To mine a block, every computer node on the blockchain network competes by trying to solve a complex cryptographic hash which is what will be used to append the new block to the other blocks, the first computer which solves this cryptographic hash announces to the network that it has solved the hash and the block will then be chained to the other blocks hence the name BLOCKCHAIN.
The miner gets rewarded for solving the hash with newly minted Bitcoin along with the transaction fee for every transaction within the block
DECENTRALISATION
Decentralisation in blockchain is the distribution of every transactional information, and data on the blockchain network to every computer node connected to the Bitcoin blockchain ecosystem,
When the computer nodes that solve the cryptographic hash broadcast to the network that it has solved the hash, the neighbouring nodes pick up the block and check if it meets the Bitcoin blockchain requirements. When it does, the node then adds the block to its copy of the blockchain. This way, every node on the Bitcoin blockchain can have the same copy of every transaction ever carried out on the blockchain
But should the block not meet the required criteria the node that first picks it up will immediately invalidate and discard it. This way the blockchain prevents double spending and keeps the network secure from attacks.
The miner's role is to keep the blockchain network secure, and they are rewarded with newly created Bitcoin, so minting of Bitcoin is not what miners do but it is a way to incentivise them for the work done
WHY DO MINERS KEEP MINING WHEN THE REWARDS ARE HALVED EVERY 210,000 BLOCKS
Despite the reduction in block rewards every halving, miners continue to participate in the network due to several factors. Because, mining is a profitable business, especially when Bitcoin's price more than triple post-halving.
Historical data reveals a pattern of price surges following halving events. For example, following the 2012 halving, Bitcoin's price surged from $12 to as high as $1,000 in the months afterwards before trading around $200. Similarly, after the 2016 halving, Bitcoin's price witnessed a significant uptrend, reaching $10,000 in the months that followed. The most recent halving in 2020 saw Bitcoin's price soar to over $69,000.
So the increase in the price of Bitcoin post-halving more than compensates for the reduction in the mining reward
While halving events undoubtedly contribute to bullish sentiment and supply scarcity, other factors such as macroeconomic conditions and market sentiment also play a significant role in driving Bitcoin's price movements, like the government bailout during the Covid which put a lot of money in circulation, the adoption of ICO in 2016 which necessitated and favour the adoption of the cryptocurrency, this explains why price does not increase drastically after each halving but rather in the months after halving and for this year halving, people believe that the U.S election in November is what will influence it.
THE FUTURE OF BITCOIN MINING AND BLOCKCHAIN
Looking ahead, the future of Bitcoin mining and the blockchain remains uncertain yet promising. As the last Bitcoin will be mined in the year 2140, miners will rely solely on transaction fees for their rewards, which at the moment is about 0.5% of their total rewards. However, advancements in blockchain technology and the fact that it can be used as the foundation for many other projects and applications ranging from stable coins like USDT that is built on it to several DeFi projects may mitigate concerns surrounding mining profitability and network security.
The security of the blockchain network relies on the continued participation of miners. Should miners exit the network due to rising costs or diminishing rewards as a result of halving, the integrity of the Bitcoin blockchain could be compromised, leaving it vulnerable to attacks and manipulation.
CONCLUSION
Bitcoin halving is a fundamental aspect of Bitcoin, designed to control the release of new Bitcoins into circulation. While its direct impact on Bitcoin's price may be subject to debate, halving events signal a growing cryptocurrency ecosystem and reinforce Bitcoin's scarcity and value proposition.
As we await the next halving event in April 2024, the cryptocurrency industry remains vigilant, anticipating both the short-term price movements and the long-term implications for the future of Bitcoin mining and blockchain technology.