Embedded in the Bitcoin code is a hard supply limit of 21 million coins. New Bitcoin is released through mining as block rewards. Miners do the work of maintaining and securing the Bitcoin ledger; as a reward, they receive newly minted Bitcoin.
However, about every four years, the reward for mining is halved–hence “the halving.” Each halving reduces the rate of new Bitcoin entering into the supply, until no more new Bitcoin is created at all in the year 2140.
Why does Bitcoin halving occur?
The Bitcoin mining algorithm is programmed to look for new blocks every ten minutes. The time it takes to find blocks will decrease as more miners join the network and add more hashing power. To restore a 10-minute objective, the mining difficulty is reset once every two weeks or so. The average time to locate a block has constantly remained below 10 minutes (roughly 9.5 minutes) as the Bitcoin network has grown dramatically over the last decade.
Bitcoin's supply is limited to 21 million units. The generation of new BTC will stop once the total number reaches 21 million. Bitcoin halving assures that the quantity of Bitcoin that can be mined each block drops over time, making BTC more rare and valuable.
Logically, the incentive to mine Bitcoin would decrease when each halving was completed. Bitcoin halvings, on the other hand, are linked to massive increases in the price of BTC, giving miners an incentive to mine more even though their payouts have been halved.
Bitcoin miners are encouraged to continue mining as prices rise. On the other hand, miners may lose the incentive to create more Bitcoin if the price of the digital currency does not rise and block rewards are reduced. This is because mining Bitcoin is a time-consuming and expensive operation that necessitates a lot of computer power and electricity.
The halving’s impact on the price of Bitcoin
The debate over whether Bitcoin halvings impact on the cryptocurrency’s price, or whether they’re already “priced in”, continues to rage.
According to the laws of supply and demand, the dwindling Bitcoin supply should increase demand for Bitcoin, and would presumably push up prices. One theory, known as the stock-to-flow model, calculates a ratio based on the current supply of Bitcoin and how much is entering circulation, with each halving (unsurprisingly) impacting on that ratio. However, others have disputed the underlying assumptions upon which the theory is based.
Historically, after previous halving events, the price of Bitcoin has increased—but not immediately, and other factors have played a part.
At the time of the June 2016 halving, the price of Bitcoin had was around $660; following the halving, Bitcoin continued to trade horizontally until the end of the month, before crashing to as low as $533 in August. But following the crash, Bitcoin’s price shot up to its then all-time high of over $20,000 by the end of the year, an increase of 2,916%.
Similarly, in the wake of the 2020 halving, Bitcoin’s price increased from just over $9,000 to over $27,000 by the end of the year—but in the two months following the halving the price failed to break $10,000. It’s also important to note that other factors also influenced Bitcoin’s 2020 bull run, most notably growing institutional investment from the likes of MicroStrategy, and PayPal’s decision to enable its users to buy and hold Bitcoin.
What happens to Bitcoin miners?
Bitcoin miners invest money in specialized mining hardware as well as the electricity required to run their rigs. The cost of this is offset by their mining rewards—but what happens when their rewards are halved?
Since the halving reduces mining rewards, the incentive for miners to work on the Bitcoin network is also reduced over time, leading to fewer miners and less security for the network.
For this reason, once the last Bitcoin is mined, miners will (assuming there haven’t been any major changes to the Bitcoin protocol) receive rewards in the form of transaction fees for maintaining the Bitcoin network.
When is the next Bitcoin halving event?
Around more than 18.5 million, or almost 89%, of the 21 million BTC that can ever exist have been mined and are in circulation. Each day, approximately 900 new Bitcoin are mined and entered into digital circulation, while faster mining rates have resulted in higher mining rates, so it could be more.
As halvings continue, the rate of Bitcoin supply increase will slow until all 21 million BTC have been mined; according to predictions, the last fractions of Bitcoin will be mined in 2140.
The payout for mining a block will be slashed in half again in the future, but no specific date has been set. When the 210,000th block has been mined since the last halving, the answer will be revealed.
Given that new Bitcoin is mined every 10 minutes, the next halving is likely to occur in early 2024 — at which point, a miner's payout will be reduced to 3.125 BTC.