Bitcoin Halving: What It Is and When It Will Happen
| KEY TAKEAWAYS: |
| — In May 2024, the highly-anticipated Bitcoin halving event will take place. — This four-yearly event decreases the mining reward by 50% as intended by the Bitcoin network’s protocol. — The halving event causes Bitcoin to become more scarce over time, giving it a disinflationary premise. — While no guarantee for the future, historically Bitcoin halving events are met with increases in its market value. |
A major event in Bitcoin history is upon us soon, namely the Bitcoin halving event. Taking place in May 2024, it’s a much-discussed topic as many see the disinflation it brings as a bullish sign for the leading cryptocurrency.
What is the Bitcoin halving?
The Bitcoin halving is the event where the Bitcoin network’s mining block reward, also known as the coinbase transaction, is cut in half. This occurs every 210,000 blocks, or roughly every 4 years.
How Bitcoin Miners Receive Rewards
To understand the halving’s impact, let’s first look at how miners receive their Bitcoin rewards. To understand in detail, check out the article on Bitcoin mining.
But essentially, miners receive their rewards on a per-block basis. It’s this mining reward that determines the rate of emission of Bitcoin (BTC) that flows into the network. Bitcoin miners dedicate specialized mining hardware and software in a lottery-like race to find the solution to the puzzle, giving them a reward in cryptocurrency. The process is known as proof-of-work (PoW). Using this consensus mechanism, the winning miner broadcasts the next pending block to the network, which is then validated by both the network of crypto nodes.
Once the block is approved, it’s added to the blockchain. Subsequently, the miner recieves the block reward, which currently yields 6.25 BTC.
The Next Bitcoin Halving: What Is It?
The looming halving event which sees this reward reduced to 3.125 BTC will be the 4th in the largest cryptocurrency’s history, with the first event reducing the block reward from 50 to 25 BTC in 2012, the second from 25 to 12.5 BTC in 2016 and the third from 12.5 to 6.25 BTC in 2020.
Bitcoin’s halving event is always a highly-anticipated moment in the network. Primarily because of the unique nature of the public network’s supply and emission schedule, Bitcoin halving events draw all kinds of speculation on how it will impact the Bitcoin market price and long-term economic incentives on miners.
Both the market and mining impact is essential to understand.
Bitcoin’s Halving Event: Why It Matters
Bitcoin has an interesting method of controlling its supply and circulation. This really sets it apart from fiat currencies, making it a more fair and economically sound system. So let’s see how it works.
- It has a capped supply of 21 million BTC
- It has a disinflationary emission schedule (i.e., the bitcoin halving)
Currently, more than 85 percent of all Bitcoins that can ever exist have already been mined. With the supply cap at 21 million, that encompasses more than 18 million BTC. Currently, 1,800 BTC is mined from 144 blocks each day, at an annual inflation rate of 3.7 percent.
In particular, the halving event is the critical moment where Bitcoin’s disinflationary emission schedule comes into play.
Every 10 minutes, the Bitcoin network issues out mining rewards. Then, every four years, these rewards decrease by 50%. This ensures less and less new Bitcoins are created. This process will continue until the year 2140, when the very last BTC will be produced. Using this method, it’s certain that Bitcoin will become more scarce over time. This is contrary to fiat currencies, which governments or central banks print more of whenever they like. As you might notice with gold, scarcity can give an asset a much greater value. Thus Bitcoin was designed in a way where it’d be more likely to increase in value over time, rather than find itself subject to inflation like fiat currencies. This is the basis of the stock-to-flow ratio principle.
What Will the Bitcoin Halving Do?
The next Bitcoin halving is expected to occur in May 2024. This time, the current block reward will reduce from 6.25 BTC to 3.125 BTC. This will reduce Bitcoin’s inflation rate to 1.8 percent, being significantly lower than the average worldwide inflation rate. This has some intriguing consequences on Bitcoin’s long-term economic impact.
Since the awarded BTC for miners decreases every four years, miners need the price per Bitcoin to increase to keep their business alive.
Interestingly, miners account for a specific portion of selling pressure on Bitcoin’s market price. This is because they sell their accumulated BTC in their wallet to buy the equipment they need. This could include hardware equipment, like ASICs, and even paying for overhead costs such as electricity. As the block reward diminishes every four years during the halving event, the selling pressure by miners should decrease on Bitcoin markets. This may cause Bitcoin’s price to swing upwards. In fact, models projecting Bitcoin’s potential market impact from the halving event often rely on its past price action. While no guarantee for the future, Bitcoin price has historically responded positively to halving events.
That said, whenever something significant happens, it can also cause volatility. Staying vigilant and doing your own research will guarantee that whatever happens, you know what to do.
Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video 3 Ways to Earn Passive Income from Crypto.