In short
- Bitcoin halving is an event in which mining rewards are reduced by half.
- This event is held every four years according to rules preset in the Bitcoin code.
The amount is paid every 4 years Bitcoin assigned to cryptocurrency Miners halve Bitcoin in a process known as halving (or halving). Here’s why and how this works:
Bitcoin Supply Limit
To understand Bitcoin halving, you must first understand the theory behind its supply.
Satoshi Nakamoto, the inventor of Bitcoin, believed that scarcity could create value that did not exist before. After all, there is only one Mona Lisa, and there are only so many Picassos, with a limited supply of gold on Earth.
Bitcoin was revolutionary in that it allowed digital goods to become scarce for the first time. There will only be 21 million Bitcoins.
The idea of limiting the supply of Bitcoin is strikingly antithetical to how fiat currencies like the US dollar work. Fiat currency was initially created according to firm rules. In other words, in order to create one dollar, the U.S. government had to stockpile a certain amount of gold. This was known as the gold standard.
Over time, these rules were weakened as economies modernized, printing more money to help stimulate struggling economies during times of extreme financial uncertainty, such as the Great Depression or World War II. Over time, these rules evolved into today’s system, which allows governments to print money (more or less) whenever they want.
Satoshi Nakamoto believed that such a devaluation of fiat money could have disastrous consequences, so the use of the code prevented any single party from creating more Bitcoin.
What is Bitcoin Halving?
The Bitcoin code has a hard cap of 21 million coins built into it. A new Bitcoin is released. mining With block rewards. Miners work to maintain and secure the Bitcoin ledger and are rewarded with newly minted Bitcoin.
However, approximately every four years the rewards for mining are halved, and each halving reduces the rate at which new Bitcoins are supplied.—The process is likely to continue until: 2140.
brief history
- 2009 – Bitcoin mining rewards start at 50 BTC per block.
- 2012 – The first Bitcoin halving reduced mining rewards to 25BTC.
- 2016 – During the second halving, mining rewards are reduced to 12.5 BTC.
- 2020 – The third halving will see mining rewards drop to 6.25 BTC.
- 2024 — During the fourth halving, mining rewards will drop to 3.125 BTC.
- 2140 – The 64th and final halving occurs and no new Bitcoins are created.
What’s so special about half-life?
If an individual, group, or government is trusted to set the money supply, there must also be trust that they will not interfere with it. Bitcoin is assumed to be like that. decentralized and unbelievable—There is no one to control and no one to trust. Because Bitcoin is not controlled by any one person or group, there must be strict rules about how much Bitcoin is created and how it is released.
By recording total supply and halving events in the Bitcoin code, Bitcoin’s monetary system is essentially entrenched and virtually unchangeable. This “hard cap” means that Bitcoin is a kind of “hard money,” like gold, and that its supply is virtually impossible to change.
What happens to Bitcoin miners?
Bitcoin miners invest money in specialized mining hardware and the power needed to run the equipment. The cost of this is offset by mining rewards. But what happens if the reward is halved?
Because halving reduces rewards, it also reduces the incentive for miners to work on the Bitcoin network, reducing the number of miners and weakening network security.
For this reason, once the last Bitcoin has been mined, miners will receive compensation in the form of transaction fees for maintaining the network (assuming there are no major changes to the Bitcoin protocol).
Currently, transaction fees account for only a small portion of miners’ revenue. Miners currently mine around 900 BTC (about $34.3 million) per day, but earn between 60 and 100 BTC (about $2.2 to $3.8 million) in daily transaction fees. This means that while transaction fees currently represent only 6.4% of miners’ revenue, they will soar to 100% by 2140.
“Transaction fees will have an inverse correlation with declining mining revenue and will increase to compensate,” said Ben Zhou, CEO of cryptocurrency exchange ByBit. decryption.
Bitcoin’s reward mechanism may change before the final block is mined. Bitcoin currently runs on: proof of work Consensus mechanism criticized by Tesla CEO and others Elon Musk This is because energy consumption is high.
Rival Cryptocurrency Ethereum We are in the process of transitioning from proof-of-work to a less energy-intensive approach. proof of stake A consensus mechanism that secures the network by allowing validators to lock or “stake” cryptocurrencies. According to the Center for Blockchain Technology at University College London, proof-of-stake blockchains use several times less energy.
Bitcoin is likely to follow suit. “Once the (proof-of-stake) technology is proven,” Niklas Nikolajsen, founder of Swiss cryptocurrency broker Bitcoin Suisse, said in an interview originally filmed for the German TV show “Galileo.” “I am confident that Bitcoin will adapt,” he said. “That too.”
However, despite environmental groups such as Greenpeace calling for a switch to proof-of-stake, it remains unlikely that a sufficient number of Bitcoin validators will support a hard fork that would switch the network to an alternative consensus mechanism.
“There is virtually no chance that a virtual Bitcoin on PoS will be accepted as the original Bitcoin, and it is highly unlikely that it will ever exist,” said Phil Harvey, CEO of Saber56, a Bitcoin mining consultancy. decryption This is a response to Greenpeace’s campaign.
“The use case for Bitcoin as a sound, decentralized, immutable, uncensored, globally accessible, self-governed reserve currency is intrinsically linked to PoW. “Core elements such as halving cycles, mining economics, and block validation all rely on this consensus mechanism,” Harvey said. “Introducing PoS to the Bitcoin network will change its entire identity and value proposition.”
price impact
The debate continues to rage on whether Bitcoin halving will affect the price of the cryptocurrency, or if it is already priced in.
According to the law of supply and demand, a decrease in the supply of Bitcoin will increase the demand for Bitcoin and possibly increase its price. One theory, known as the Stock-to-Flow model, calculates the ratio based on Bitcoin’s current supply and circulation, with each halving (unsurprisingly) affecting that ratio. However, others have disputed the basic assumptions underlying the theory.
Historically, after previous halving events, bitcoin price It increased, but not immediately, and other factors also played a role.
At the time of the June 2016 halving, the price of Bitcoin was around $660. After the halving, Bitcoin continued to trade horizontally until the end of the month before falling to $533 in August. However, the price of Bitcoin soared to a then-high of over $20,000, up 2,916% by the end of the year.
Likewise, after the 2020 halving, the price of Bitcoin rose from just over $9,000 to over $27,000 by the end of the year, but the price did not exceed $10,000 in the two months following the halving. It’s also important to remember that other factors influenced Bitcoin’s 2020 bull run, including increased investment from institutions like MicroStrategy and PayPal’s decision to allow users to buy and hold Bitcoin.