During the COVID-19 pandemic, the U.S. Federal Reserve injected $3 trillion into the economy within just three and a half months.
This move underscores a fundamental issue with fiat currencies: central authorities can print money at will, addressing short-term problems but often leading to long-term complications.
Bitcoin emerged as a revolutionary solution to the challenges posed by fiat currencies. Unlike traditional money, Bitcoin operates without central control. With a fixed supply of 21 million Bitcoins, it offers a transparent and finite monetary system.
The creation of new Bitcoins is meticulously regulated. Miners, using computational power, generate new blocks and receive Bitcoin as a reward. This process is governed by a mechanism known as “halving,” which periodically adjusts the reward amount.
Halving ensures a controlled release of new Bitcoins, positioning Bitcoin as a safer alternative to fiat money, which is prone to arbitrary inflation.
What is Bitcoin Halving?
Bitcoin Halving is a pivotal event that slashes the miner reward in half once every 210,000 blocks are successfully mined on the Bitcoin network, occurring approximately every four years.
This halving mechanism was embedded in Bitcoin’s code from its inception, making it virtually impossible to alter.
To understand its significance, let’s look at past halvings:
- The first halving occurred on November 28, 2012, reducing the reward from 50 BTC to 25 BTC.
- The second halving took place on July 9, 2016, further cutting the reward to 12.5 BTC.
- The third halving, on May 11, 2020, decreased the reward to 6.25 BTC.
This cycle will continue until the 64th halving in 2140, after which no new Bitcoins will be created, and miners will rely solely on transaction fees for income.
Why Does Halving Occur?
Differentiating Bitcoin from Fiat Currencies
As you know, conventional currencies are subject to control by central authorities.
Bitcoin’s founder, Satoshi Nakamoto, foresaw the pitfalls of centralized control. By implementing an upper cap on Bitcoin’s supply, Satoshi ensured that no entity could arbitrarily inflate its value.
Incentivizing Participation in the Bitcoin Ecosystem
With a fixed supply, there’s an urgency to acquire Bitcoin before it runs out, driving demand and encouraging broader participation in the network.
Facilitating More Equitable Wealth Distribution
Unlike the disproportionate wealth distribution seen with fiat currencies.
Bitcoin’s halving mechanism promotes a more even distribution of wealth. As the reward diminishes, transaction fees will become the primary income source for miners, encouraging wider distribution.
Impact of Halving
Impact on Bitcoin Price
When demand increases or remains constant while supply decreases, the price will inevitably surge — a basic principle of microeconomics.
Each halving reduces Bitcoin’s supply, coinciding with growing demand, which has historically led to price increases.
For example:
During the first halving in 2012, excitement was palpable as the price surged from around $11 to $12 to an astonishing $1,038 within a year — a staggering 9,336.36% increase.
Similarly, in 2016, after the second halving, the price swiftly climbed from $576 to $650, only to surge to $2,526 a year later, marking a 288.60% increase in valuation.
Even in the 2020 halving, in just the last two months, Bitcoin’s price increased by 416%, from $18,383 at the end of November to $28,993 at the end of December.
Thus, halving has historically led to significant price hikes, driving Bitcoin adoption. The 2024 halving may not replicate the same magnitude of price surge due to factors such as enhanced transaction volume tracking and the rise of Bitcoin futures trading.
On 2024 April 13, approximately one week away from the halving event, the price of one BTC dipped from more than $67,000 to $62,000. And after halving, the price went up to $66,000.
The true impact of the 2024 halving on Bitcoin’s price will reveal itself over time, but past halvings indicate a positive correlation between halving events and price appreciation.
Impact on Mining
Mining is the backbone of Bitcoin, ensuring network security and decentralization. As such, it’s directly impacted by halving.
Miners earn Bitcoins through block rewards and transaction fees. After the 64th halving, miners will rely solely on transaction fees, making each Bitcoin more valuable.
While block rewards currently outweigh transaction fees, halving cuts rewards in half, which might discourage some miners. However, history shows a different trend.
After the 2012 halving, the hashrate initially dropped from 27.61 THash/s to 19.98 THash/s but steadily climbed to 60 THash/s within six months. A similar pattern emerged after the 2016 halving, with the hashrate rebounding from 1.40 EHash/s to 3.85 EHash/s in seven months. The 2020 halving followed a comparable trend, with the hashrate eventually rising back to around 120 EHash/s.
This increase in mining activity is driven by both Bitcoin’s price appreciation and the adoption of advanced mining hardware like ASICs. It underscores miners’ confidence in Bitcoin’s future, ensuring ongoing network security and decentralization.
Final Thought…
Halving is a critical event in the Bitcoin network, regulating the coin supply and maintaining its decentralized nature.
This mechanism distinguishes Bitcoin from fiat currencies, which often face significant financial challenges over time due to a lack of supply control.
What Is Bitcoin Halving: How This Event Influences Bitcoin’s Ecosystem was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.