The rate of bitcoin issuance gets cut in half every 210,000 blocks or every four years, earning these events the title of a “Bitcoin Halving”. These issuance rate cuts, or “halvings”, will continue until the very last satoshi is mined. This is estimated to happen in 2140.
The halvings demonstrate the deterministic nature of bitcoin’s issuance schedule and ultimately cap the total supply at 21 million bitcoins.
Bitcoin Halving Explained
The creator of Bitcoin, Satoshi Nakamoto, needed to incentivize other people besides him or herself to run the Bitcoin protocol. The protocol was designed to reward miners with newly minted bitcoin for their contributions much like a newly formed company will issue equity to early employees for their contributions. He also wanted to differentiate it from government currencies which were inflationary by design and whose issuance schedule was highly uncertain and opaque.
The halvings were a creative mechanism for very gradually transforming bitcoin from a high emission asset in the early days of the protocol into an asset with little to no new issuance that was ultimately capped.
What is Bitcoin Mining?
At the core of Bitcoin’s operation is the mining process, which secures the network and processes transactions using the Proof of Work (PoW) system. In this system, miners solve complex mathematical problems to validate transactions and earn block rewards—bitcoins along with transaction fees.
Miners employ specialized hardware and software to compete in solving these problems. The first miner to find a correct solution claims the reward, thereby maintaining the integrity of the blockchain and creating new blocks in the network.
The reward for mining Bitcoin decreases over time due to the Bitcoin halving events, which continue until the total supply reaches 21 million bitcoins. After this limit is met, miners will earn income solely from transaction fees.
How Does Bitcoin Halving Work?
Every miner and node on the Bitcoin network runs software that contains the rules of the Bitcoin protocol such as those relating to the validity of transactions and the emission schedule of the bitcoin asset. The code outlining the emission schedule requires the amount of new bitcoin rewarded to miners for each successfully mined block to be cut in half every 210,000 blocks or every four years.
For example, during the first 210,000 blocks of Bitcoin’s existence, the newly minted bitcoin rewarded to the winning miner was 50 btc per block. On the 210,001 block, post-halving, the winning miner could only collect 25 btc in that block. If they tried to give themselves more than 25 that block would have been rejected by the network and another block mined by a miner that followed the protocol rules would be the block accepted by the network.
Impact of the Bitcoin Halving
The most immediate and direct impact of Bitcoin halvings is on the miners. Block rewards are cut in half, reducing their revenue quite dramatically. Low cost miners will be more prepared to weather the reward cut, but miners that are barely operating at a profit might turn unprofitable rather quickly unless there is a huge increase in fees collected from users or there is a huge price increase that keeps them alive.
We also know that the cut in the issuance rate cuts the amount of new supply that can be sold by miners. Miners typically need to sell much of their block rewards to pay for their operating costs which are mostly denominated and paid for in their local fiat.
If we assume demand for BTC stays constant and there is a reduction of new supply hitting markets, prices should be pushed up. This dynamic should have some effect on markets, but when examining some of the reported volume traded on exchanges compared to the maximum amount of new supply that could be sold by miners, the effect might not be as big as some may think it is.
However, after every halving, there has been explosive growth in the price of Bitcoin. For example, the fourth halving happened earlier this year and the price of one bitcoin was around $64,000 USD. Today, one bitcoin is priced at over $100,000 USD. This is a 57% increase in only 7 months. Did the halving “cause” this increase? It’s by no means the sole reason, but it can’t be denied that it is a strong factor given the historical price behavior of Bitcoin after each halving.
Benefits of the Bitcoin Halving
Less supply hitting the market from the halving cut and the mining ecosystem being constituted by healthier firms that do not need to sell leads to less selling pressure. This isn’t bullish on its own, but it definitely removes some selling pressure that could stop or diminish a bull market.
In addition, the Bitcoin halving has historically brought a lot of positive attention and excitement to bitcoin from speculators, investors, users, and the media. The halving mechanism inadvertently serves as a marketing device that increases bitcoin brand recognition and ignites debate about the properties of bitcoin. The more people talk about bitcoin the greater the chance some subset of them will evaluate it as an asset they may want to use in some fashion. Increasing adoption is increasing demand which pushes prices up, something every bitcoin user benefits from.
When Is the Next Bitcoin Halving?
The next Bitcoin halving is expected to occur around mid-March 2028. It will happen after block 1,050,000 has been mined. The block reward going to miners will halve from the current rate of 3.125 BTC per block to 1.5625 BTC per block. Tick tock next block.