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Bitcoin halving: What it is and how it affects the cryptocurrency

3 Mins read

Bitcoin is unique among cryptocurrencies for many reasons, not least of which is its programmed monetary policy. At the heart of this policy is the concept of “Bitcoin halving” – an event that occurs every four years to systematically reduce the rate at which new bitcoins enter circulation.

But what exactly is Bitcoin halving, how has it impacted the cryptocurrency in the past, and what can we expect to see when the next halving occurs in 2024? Let’s dive in.

What is Bitcoin halving?

Bitcoin’s supply is capped at 21 million coins. This fixed supply is a core part of the cryptocurrency’s design, programmed by its creator Satoshi Nakamoto. To maintain this scarcity, Nakamoto built in a process called halving that reduces the rate at which new bitcoins are introduced over time.

Specifically, the “reward” given to Bitcoin miners for validating transactions and adding new blocks to the blockchain is cut in half approximately every four years. When Bitcoin launched in 2009, this reward was 50 BTC per block. After the first halving in 2012, it dropped to 25 BTC. The second halving in 2016 reduced it further to 12.5 BTC, and the third halving in 2020 brought it down to the current 6.25 BTC.

The next Bitcoin halving is expected to take place around April 2024, at which point the block reward will be decreased to just 3.125 BTC. This will continue happening until the final bitcoin is mined sometime around the year 2140, at which point miners will be incentivized solely through transaction fees rather than block rewards.

Important points about previous Bitcoin halving

Since Bitcoin’s inception, there have been three halving events so far:

  1. The first Bitcoin halving occurred on November 28, 2012, reducing the block reward from 50 BTC to 25 BTC. In the year following this first halving, the price of bitcoin skyrocketed from $12 to over $1,000.
  2. The second halving took place on July 9, 2016, cutting the reward to 12.5 BTC per block. Within 18 months, the bitcoin price hit a new all-time high of around $20,000.
  3. The third halving happened on May 11, 2020, lowering the reward to 6.25 BTC. The price of bitcoin then went on to reach a new record high of approximately $66,000 in the 18 months after this event.

In each case, the halving events were preceded by price rallies as the market anticipated the reduced supply of new bitcoins entering circulation. And in the months and years that followed, bitcoin’s price tended to surge to new highs.

The effects of Bitcoin halving

Bitcoin halving events have several key effects on the cryptocurrency and its ecosystem:

  1. Decreased inflation Rate: By reducing the rate at which new bitcoins are mined, halving events decrease the overall inflation rate of bitcoin. This can make the asset more attractive as a store of value.
  2. Increased scarcity: With a fixed 21 million BTC supply cap, the halving events gradually make bitcoin a scarcer asset over time. This increased scarcity, combined with consistent demand, can drive up the price.
  3. Mining profitability: The halving events directly impact the profitability of bitcoin mining. Miners receive 50% less rewards per block, which can force some smaller or less efficient miners out of the market. This can lead to mining pool consolidation over time.
  4. Price volatility: Historically, bitcoin’s price has shown significant volatility in the months leading up to and following a halving event. Anticipation of the reduced supply tends to drive up prices, while the actual event can lead to short-term corrections.
  5. Transaction fees: As block rewards decline, miners will become increasingly reliant on transaction fees to maintain profitability. This could incentivize the network to optimize for higher fee throughput over time.

Read also: Why does Bitcoin mining consume so much energy? How to reduce the carbon footprint

What to expect after the next halving

The next Bitcoin halving is expected to occur around April 2024. Based on past patterns, we can anticipate several key outcomes:

  1. Price surge: The market will likely price in the upcoming supply reduction, leading to a bitcoin price rally in the months leading up to the halving. However, a short-term correction after the event is also possible.
  2. Mining consolidation: The lower block rewards will squeeze profit margins for smaller, less efficient miners. This could drive further consolidation in the mining industry, with larger, more sophisticated operations dominating the network.
  3. Increased reliance on fees: With block rewards cut in half, miners will need to rely more heavily on transaction fees to maintain their profitability. This may incentivize the network to optimize for higher fee throughput.
  4. Reduced inflationary pressure: Bitcoin’s annual inflation rate will drop even further post-halving, currently projected to fall below 2%. This could make the asset even more attractive as a long-term store of value.
  5. Potential volatility: As with previous halvings, the 2024 event is likely to spur significant price fluctuations in the short term. Investors should be prepared for heightened market volatility around this milestone.

It’s important to note that while past performance is not necessarily indicative of future results, Bitcoin’s halving events have played a key role in the cryptocurrency’s price appreciation over time. However, other factors like adoption, regulation, and broader economic conditions will also influence Bitcoin’s trajectory going forward.

Ultimately, the 2024 halving represents another step in the programmed monetary policy that underpins the Bitcoin network. By reducing the rate of new supply, it helps maintain Bitcoin’s scarcity and shape its long-term value proposition. As the cryptocurrency ecosystem continues to evolve, the impact of these periodic halving events will remain a crucial consideration for Bitcoin users, investors, and enthusiasts alike.

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When I'm not reading about tech, I'm writing about it, or thinking about the next weird food combinations to try. I do all these with my headphones plugged in, and a sticky note on my computer with the words: "The galaxy needs saving, Star Lord."
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