Reduced circulating supply
Bitcoin halving, translated as “half” in Greek, is the event where Bitcoin’s mining block reward, also known as a Coinbase transaction, is halved every 210,000 blocks, or approximately every 4 years. The reward is issued on a per-block basis and is the rate at which Bitcoins are generated in the network’s total supply of 21 million approximately every 10 minutes.
The mining reward is the determining factor in the Bitcoin (BTC) rate flowing across the network, with the inflow of BTC compared to the mining hash strength regulated by Bitcoin’s difficulty adjustment algorithm.
Bitcoin’s last Halving took place in May 2020 reducing the current block reward from 12.5 BTC to 6.25 BTC.
Miners dedicate specialized mining hardware and software to a lucky ticket-like race to find a certain price (the nonce) below a certain threshold, giving their equipment hash power to the Bitcoin network. This process is known as proof-of-work (PoW).
Once the block is approved and attached to the blockchain, the miner receives the block reward, which currently rewards 6.25 BTC. The impending event that half sees this reward reduced to 3.12 BTC will be the 4th in the history of the largest cryptocurrency, with the first event reducing the block reward from 50 to 25 BTC in 2012 and the second from 25 to 12.5 BTC in 2016.
The fact of halving in Bitcoin is always a long-awaited moment on the network. Mainly due to the unique nature of the public network’s procurement and emissions program, Bitcoin halves events give rise to all sorts of speculations about how it will affect the market price and long-term financial incentives to miners.
The Importance of Bitcoin Halving
Bitcoin was designed with a controlled availability (of currencies) that has many unique features that distinguish it from other money systems such as fiat currencies.
- Its availability (supply) is limited to 21 million BTC
- It has a schedule of deflationary emissions (i.e., bitcoin halving)
Currently, over 85 percent of all Bitcoins that will ever exist have been mined. With the supply cap at 21 million, this includes more than 18 million BTC. Currently, about 1,800 BTC are produced every day by 144 blocks with an annual inflation rate of 3.7%.
In particular, the fact of halving is the critical moment when bitcoin’s anti-inflationary emissions program comes into play.
Mining rewards issued every 10 minutes are reduced by 50% every 4 years, ensuring that fewer and fewer new Bitcoins are created by 2140 when the last BTC is produced. This element secured by Bitcoin’s protocol will make it rarer over time. This is contrary to fiat currencies, where more money can be printed whenever a government or central bank issues it, potentially leading to inflation. As seen with gold, scarcity can give an asset much more value. This principle is popularly known as the stock-to-flow ratio.
In other words, Bitcoin is designed in a way that would be more likely to increase in value than decrease like fiat currencies.
The next halving event will reduce Bitcoin’s inflation rate to 1.8%, being significantly lower than the average global inflation rate. This has some interesting implications for Bitcoin’s long-term economic impact.
Since the award-winning BTC for miners decreases every 4 years, miners need a price increase per Bitcoin to keep their business alive.
Interestingly, miners account for a certain part of the selling pressure on the buy price of bitcoin because they sell their accumulated BTC to buy hardware equipment, such as ASICs, and pay for overheads, such as electricity. As the block reward decreases every 4 years during the event by half, the selling pressure from miners should be reduced in the Bitcoin markets. This potentially allows the price of Bitcoin to move upwards.
However, models that project Bitcoin’s potential impact on the market from its halving event are often based on what it has done in the past. Although there is no guarantee for the future, the price of Bitcoin has historically responded positively to the decline in halving events.