Bitcoin Halving: What is It and Why Should You Care?
Last Updated 09/22/2018
What is the Bitcoin Halving? What does it mean? When does it happen? What happens to the value of bitcoin when it does happen?
Every 4 years on average (210K blocks) the reward granted to miners for adding a block to the blockchain is cut in half. The Bitcoin halving was designed by Satoshi Nakamoto to keep Bitcoin’s inflation in check.
If you want a detailed explanation about the Bitcoin Halving keep on reading. Here’s what I’ll cover in this post:
- What is the Bitcoin halving?
- When will the next halving happen?
- The Halving’s effect on Bitcoin’s price
Don’t like to read? Watch the video version of this article:
To understand what The Bitcoin Halving is, you must first understand the basics of Bitcoin mining. In short, new Bitcoins come into the world as a reward for miners whenever they mine a Bitcoin block.
When Satoshi Nakamoto set up the rules for the Bitcoin protocol he stated two important things, among others:
First, that the supply of Bitcoin is finite and limited to 21 Million. Second, that the number of bitcoins generated per block i.e. the reward is set to decrease by 50% every 210,000 blocks. Since 6 blocks are found on average within an hour and halving happens once every 210,000 blocks, this means that every 4 years (give or take) there will be a halving event.
This basically means that the mining reward will be reduced by 50% from what it used to be. For example, if today each miner receives 12.5 Bitcoins for solving a block, after the next halving event they will receive only 6.25 BTC and so forth.
Following this math, the final number of Bitcoins will be roughly 21 million (20999999.9769 to be exact) by the year 2140.
Of course the fact that 21 million Bitcoins have been generated doesn’t mean that there are actually 21 million Bitcoins that can be spent. You need to take into account that there are many lost Bitcoins which will never be recovered (it’s assumed that 1/3 of the Bitcoins mined until today were lost).
Why should you even have a halving event?
So why the change? Why not keep the reward the same? Isn’t that unfair to the miners? The answer to that question lies in the law of supply and demand. If the coins are created too quickly, or there’s no end to the number of bitcoins that can be created; eventually there will be so many bitcoins in circulation that they would have very little value.
Vitalik Buterin, the lead developer of the Ethereum project, wrote an op-ed piece for Bitcoin Magazine and explains the need for slowing the distribution of bitcoins through halving this way:
“The main reason why this is done is to keep inflation under control. One of the major faults of traditional, “fiat”, currencies controlled by central banks is that the banks can print as much of the currency as they want, and if they print too much, the laws of supply and demand ensure that the value of the currency starts dropping quickly.
Bitcoin, on the other hand, is intended to simulate a commodity, like gold. There is only a limited amount of gold in the world, and with every gram of gold that is mined, the gold that still remains becomes harder and harder to extract. As a result of this limited supply, gold has maintained its value as an international medium of exchange and store of value for over six thousand years, and the hope is that Bitcoin will do the same.” ~ Vitalik Buterin, Bitcoin Magazine.
Since we know the average block generation time (10 minutes) we can estimate that the next halving event should occur somewhere around 2020. There are websites such as BitcoinClock which show you a countdown until the next event.
Having said that, some community members have noticed that in fact, since the creation of Bitcoin, a new block has been created every 9 minutes and 20 seconds on average and not every 10 minutes as presumed. This is 7% faster than the presumed time of 10 minutes.
Of course the main question people want to know is “will this affect Bitcoin’s price?” and the answer is “nobody knows”. In 2016, a week after the halving event, not much happened to the exchange rate of bitcoin against the US dollar. While bitcoin was trading at around 650 US dollars at the time of the event, a week later the rate was about 675, so not much of a change.
Still, there are arguments in favour of two scenarios – either the price will rise, or nothing will change.
Some claim that the halving event is well known to the community and therefore will not surprise anyone or cause a major change in Bitcoin’s price. Others claim that due to shortage in “Bitcoin supply” the price is bound to climb as demand will increase. However no one seems to think that the halving may lower the price of Bitcoin in any way.
For example, on November 28th 2012 the first Bitcoin halving occurred when block 210,000 was solved. Back at the time Bitcoin’s price was $13.42 and the halving didn’t seem to affect the price that much. Indeed, shortly after Bitcoin’s price spiked to $230, but many attribute that to the Cyprus bailout.
Bitcoin was designed to be valuable. To support this the specific rules were set.There will only ever be a specific number of Bitcoins in existence (21 million) and inflation is kept in check by slowing its distribution through the process of halving. I hope this gives you a better idea of what bitcoin halving is, and why it’s an important feature of what gives bitcoin its value.
You may still have some questions. If so, just leave them in the comment section below.
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