Bitcoin Halving

Understanding Bitcoin Halving: A Beginner’s Guide For 2024

What Is Bitcoin Halving?

The process of halving the Bitcoin mining reward is when the reward is split in half. As a benchmark for consistently reducing the rate of cryptocurrency introduction, the blockchain’s creators established that it would take the network around four years to open 210,000 additional blocks.

The first reward was 50 bitcoin. Previous halving dates were:

  • November 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 second saw halving of the block reward will occur in 2028, when it will fall to 1.625 BTC. As of April 2024, around 19.69 million bitcoins were in circulation, and about 1.31 million were still to be sent through mining awards.

KEY TAKEAWAYS

  • A Bitcoin halving event occurs when the reward for mining Bitcoin transactions is cut in half.
  • Halvings reduce the rate at which new coins are created and thus lower the available amount of new supply.
  • Bitcoin last halved on April 19, 2024, resulting in a block reward of 3.125 BTC.
  • The final halving is expected to occur in 2140, when the number of bitcoins circulating will reach the theoretical maximum supply of 21 million.

Basics of the Bitcoin Network

Knowing the inner workings of the Bitcoin network is a prerequisite to comprehending a Bitcoin halving. Blockchain, the technology behind Bitcoin, is a decentralized ledger that records all or part of the transactions that have taken place on the network. This ledger is maintained by a network of computers, or nodes, that run the Bitcoin software. In Bitcoin’s network, each full node approves or rejects a transaction and keeps track of the whole history of Bitcoin transactions. The node verifies the legitimacy of the transaction to accomplish this. Among these, you should check that the transaction length is within the acceptable range and has the proper validation settings.

Every transaction needs to have personal permission. This will happen once all of the transactions in a block have been passed. The next step is to send the transaction to other nodes and add it to the live blockchain during confirmation. Are connected, more computers, or nodes, are added to a blockchain, which increases its security and reliability. Estimates put the number of nodes executing the Bitcoin code at 19,329 on April 19, 2024. Nodes on the network make it possible for anybody with enough space to view the complete blockchain and all transactions, regardless of whether they have the gear to mine Bitcoin.

Basics of Bitcoin Mining

To process and verify transactions, Bitcoin’s blockchain network relies on a process known as “mining,” in which users employ computers or mining gear. Rewards and transaction fees are given to miners. Bitcoin uses the proof-of-work (PoW) technique to verify the details of transactions. The term “proof-of-work” describes the cryptographic problem since it requires time and effort.

Although not used literally, “mining” describes obtaining valuable metals. Once all transactions are caught in a block, they get done and put into the mining queue. When a Bitcoin transaction waits for verification, miners compete against the clock to see who can find a lesser transaction number than a network-set objective. The hash is a hexadecimal number containing the secrets of the previous blocks.

Mining is done to validate the transactions in a block and create a new one. In a subsequent round of confirmations, nodes double-check the transactions. The process generates the blockchain, a series of blocks containing information.

Bitcoin Halving Effects

Inflation

One of the main ideas is to cut the reward in half in response to worries about inflation. The quantity of items that a particular amount of currency can purchase at any specific moment decreases due to inflation. The price of a standard American basket of products is a good indicator of inflation in the United States. Although 2% inflation is more of an objective than an achievable one, any amount of inflation is good for the economy. This is why central banks often aim for it.

By reducing the reward amount and preserving scarcity, Bitcoin Halving aims to mitigate the inflationary effects on Bitcoin. Bitcoin holders are nonetheless vulnerable to inflationary pressures emanating from the fiat currency, and they must convert their Bitcoins to transact in an economy despite this “protection” mechanism. Profits from the cryptocurrency’s market value might shield investors from inflation, but they wouldn’t help with the currency’s primary function: making payments.

Demand

It is generally the case that demand for new Bitcoins will grow when a halving occurs because it reduces the number of new Bitcoins released. By observing the trend, one can see that the price of Bitcoin usually goes up after each previous halving.

Investing

Bitcoin was never meant to be a storage of wealth. Its introduction was a move toward a more decentralized financial system free of intermediaries and regulatory bodies. Investors started flocking to it as word got out about the profits it might make. The demand for cryptocurrency rose as investors came to the emerging asset class, causing its developers to miss the mark. Investors lose out when the quantity of new coins is cut in half, but they could earn out if the event’s effects don’t change—the chance of a boom in value. Since Bitcoin investors are betting on the cryptocurrency’s value rising, this type of investment falls under the speculation category.

Mining

Miners are profit-seeking miners. Miners who made substantial gains receive compensation with more Bitcoins. Bitcoin’s price changed over the years, but significant mining companies kept functioning because it was profitable. However, halving mining rewards makes it less profitable if prices stay the same or drop. Large-scale mining facilities needed to compete cost a lot of money and energy. Equipment and facilities require upkeep and workers. They have to improve their mining capabilities if they want to keep their industrial position.

In February 2024, Marathon Digital Holdings, one of the world’s top mining companies, added 16,930 Bitcoin and 231,000 miners. As of April 19, 2024, the firm’s hash rate is 28.7 trillion per second, accounting for 5% of the network’s overall hash rate.56 Increased production capacity and holdings were likely related to anticipations of the April 2024 halving and the hashing power needed to stay competitive and have liquidity to finance operations.

A smaller pool of miners has less chance of winning when the payout drops. Participating miners in a mining pool may expect a 50% reduction in profits, even if prices rise. However, barring a significant market event, the cost of Bitcoin will not quadruple to preserve the present level of profitability.

Consumers

A possible halving of the value of Bitcoin might impact consumers and retail users. Buyers of Bitcoin will typically only feel the effects of price fluctuations, which might or might not be comparable to those experienced before the halving. A halving has the same effect on people who use Bitcoin to send money as it does on people who use it to shop. The market value of Bitcoin following the halving event will determine the amount of their payments.

What Happens When Bitcoin Halves?

The concept of “halving” about Bitcoin refers to determining the number of rewarded tokens. Theoretically, this should boost demand as a method to mimic falling returns.

Why Are the Halvings Occurring Less Than Every 4 Years?

The Bitcoin mining algorithm comes to look for new blocks every ten minutes.7 Depending on the block, it could take anything from ten minutes to less than that. Depending on this, it may take more or less time to reach the next halving objective. To illustrate the point, mining 210,000 blocks takes an average of 9.66 minutes per block. The total days needed to complete this task would be approximately 1,409 (four years is 1461 days, including one day for a leap year).

What Happens When There Are No More Bitcoins Left?

Experts agree that 2140 was the year of the last Bitcoin mine. With a 50% reduction per 210,000 blocks, the incentive will fall to 1 satoshi, and 21 million will be in circulation. It is impossible to divide the satoshi, the smallest unit of Bitcoin, 0.00000001 Bitcoin, in two.

The Bottom Line

A Bitcoin halving halves the supply of new Bitcoins. Once 21 million bitcoins accumulate, the rewards system will end in 2140. Miners received 50 bitcoins per block in 2009. After the first halving, bitcoins were 25, 12.5, and 6.25 on May 11, 2020. The latest halving reduced the reward to 3.125 on April 19, 2024.

Bitcoin halving dramatically impacts the network. As a result of smaller organizations and miners leaving or being acquired by larger ones, the mining sector may undergo consolidation after the halving event. For informational reasons only, Investopedia posts comments, opinions, and analyses online. See our liability disclaimer and warranty for details. As of this essay, the author has no Bitcoin.

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