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What is a Bitcoin halving?

What is a Bitcoin halving?

A halving is an event that halves the rate at which new Bitcoins are generated. This event occurs once every four years.

One of the most important characteristics of Bitcoin is that its supply if finite. The maximum of Bitcoin to every exist is 21 million, after the last Bitcoin has been produced, the network will stop producing more.

This characteristic is one of the reasons Bitcoin is often referred to as digital gold. Like gold, there is only a limited supply of Bitcoin, and someday, all will have been extracted.

At the moment of writing, there are around 18 million BTC in circulation; this accounts for roughly 85% of the total supply. However, this does not mean that the cryptocurrency is about to reach its limit of 21 million any time soon.

The reason is the protocol, which has been coded into the blockchain from the very start. Every 210,000 blocks, the protocol performs the so-called Bitcoin "halving" or "halvening". Producing new coins becomes more difficult — just like in gold mining, where finding new deposits becomes more challenging over time.

More specifically, the protocol cuts the block reward in half. So, every time a Bitcoin halving occurs, miners begin receiving 50% fewer BTC for verifying transactions. Hence the name halving.

What is a block reward?

In short: the amount of Bitcoin, a miner, receives for every new block they add to the blockchain.
To explain this concept in more detail, we should go back to the roots of Bitcoin — the technology called blockchain. In its most basic description, a blockchain is a decentralized digital ledger that stores data about its transactions in so called blocks that are each around 1 Megabyte in size. For instance, when John sends Bitcoin to Alice, this transaction will be stored in a block, along with around 500 other transactions that happened during the same time.

A block reward is the amount of cryptocurrency that a miner receives when they successfully validate a new block. Validation is done by solving highly complex mathematical problems. They do this by utilizing mining hardware which is basically a GPU or CPU you also find in your computer. A long story short, it is a reward for their hard work.

When is the next halving?

The week commencing 14 May 2020, based on current performance.
The exact date on which the halving will take place is impossible to say at this point. This is because the time to generate a new block may increase or decrease. On average, the network produces one block every ten minutes. The last halving is expected to happen sometime in the year 2140 as the 21 millionths BTC will be mined. Once this has happened, miners stop receiving block rewards but will keep the remaining source of revenue, which is the fees paid by the users of the network to send transactions.

The new block reward?

With every newly mined block, 6.25 new BTC will be produced. At launch, the block reward was eight times as much, 50 BTC for every new block. Hence, a total of 10,500,000 BTC was generated before the first halving took place in November 2012, after which miners would receive 25 BTC for each block.
It may seem like a very generous bonus, more than €325,000 per block, based on current value. But remember, the network was only just starting to develop at the time. No one knew for sure if people would continue to find the idea worthy of dedicating their computing power into the Bitcoin blockchain to keep it running. Another factor to take into account is that the all-time high price for that period was $31 per BTC in June 2011. That price quickly decreased, and Bitcoin was back to $2 before the year‘s end. Nevertheless, mining has turned out to be much more profitable for those who got in early. This is a big part of the reason critics call Bitcoin a Ponzi scheme.

The second Bitcoin halving occurred on July 6, 2016, as block number 420,000 was produced, and miners began collecting 12.5 BTC for every new block, which is the current rate. The third halving will reduce that rate in half yet again, which will lower the block reward to just 6.25 BTC, or around €40,000, given the current market price.

What will happen to the miners?

Some smaller miners might be forced to leave or at least upgrade their hardware.
At the moment of writing the majority of Bitcoin mining is performed by giant mining companies. An example of such a company is Bitmain, the China-based company that was worth $12 billion at some point in 2018. Bitmain validates blocks with thousands of extremely powerful and energy-consuming machines called application-specific integrated circuit miners (better known as ASIC's). These miners are much more efficient compared to the setups used by most individuals.

With the block reward declining, mining rigs that are barely breaking-even will be forced to quit the market. There will still be businesses willing to mine Bitcoin at a reduced rate. Still, the market might become less decentralized as a result. However, new and more efficient ways to mine BTC could emerge, potentially enabling smaller businesses and individuals to partake.

Does a halving influences Bitcoin‘s price?

Looking at the previous halvings, the price has always gone up afterwards, but in the end, it depends on supply and demand.
Bitcoin halvings essentially cut down the supply of BTC, making it scarcer. If the demand remains the same, the price is likely to increase. There are also some historical examples of this. On the 28th of November in 2012, the day of Bitcoin's first halving, the cryptocurrency's price rose from €9,90 to €10,80. It continued to climb up throughout the next year, reaching €935 on the 28th of November 2013.

Four years later, a month before the second halving. The price of Bitcoin started to follow a similar, bullish pattern. It surged from €520 on the 9th of June to €585 on the 9th of July 2016. This was the day that the block reward was reduced by half for the second time in Bitcoin's history. Just as with the first halving, BTC continued to accelerate through the next year, albeit with occasional turbulence and traded at €2270 on the 9th of July 2017. Will it be the same next time? Sceptics believe that the halving has already been priced in although there is no way to verify this.

Furthermore, the market has drastically changed over the last four years, as cryptocurrencies and Bitcoin, in particular, have become a part of mainstream news coverage. Nevertheless, some people will take the chance, given the previous patterns exhibited around Bitcoin halvings.

After all, if history repeats itself and the price starts going up around May 2020. Additional traders might start buying the asset out of a fear of missing out, thus stimulating the demand, and, ultimately, the price.