When Satoshi Nakamoto released Bitcoin to the public, he made sure that the ‘digital gold’s value is maintained by capping its production to 21 million. To do this, Bitcoin halving takes place every four years when the 210,000th block is added to the blockchain. When this happens, the miners’ BTC rewards are halved, which will ensure its scarcity and spike up its market value.
Are you curious to know more about why this event is important in the crypto market? Learn more about when you read this article.
Why Bitcoin halving happens
Every time 210,000 blocks are mined, block mining rewards are halved. When Bitcoin was still in its infancy in 2008, the mining reward was 50BTC per block. Then in 2012, as the first 210,000 blocks were mined, this reward was halved to 25 BTC.
Satoshi Nakamoto made Bitcoin halve every four years so that it can retain its overall value and to prevent the overproduction of BTC tokens to ensure that its value will be maintained through scarcity. Once all the 21 million Bitcoins are minted, there will be no more tokens in circulation, making the remaining BTCs more valuable.
Usually, ‘halving’ can mean that the value of something will decrease. However, in terms of Bitcoin, there have ironically been larger surges in the price of tokens. When Bitcoin is halved, the incentives they receive are also cut, which pushes BTC’s price up in the market.
In 2009, being a Bitcoin miner incentivized you with a reward of 50 BTC. The incentives then dropped to 25 BTC in 2012. 4 years later, miners received 12.5 BTC, until it was cut again in 2020 to 6.25 BTC. When the 740,001st block is added to the chain, miners will then be rewarded with 3.125 BTC.
These price increases actually encourage the miners to continue mining. When the price of bitcoins don’t rise but the block rewards are halved, mining will no longer create more bitcoins. Once this happens, there won’t be enough bitcoin left to rise in value, since there are no new bitcoins being created.
The next Bitcoin halving is expected to happen in 2024, with the crypto mining reward reduced to 3.125 coins.
Impact of Bitcoin halving to Bitcoin price
Based on the three times Bitcoin has been halved, a positive correlation has been found for doing so. In fact, halving has even increased the overall value of bitcoin.
Here are the three halvings in Bitcoin’s existence to illustrate the growth:
The first halving (2012) – When the first Bitcoin halving occurred in 2012, the price of bitcoin rose from merely $11 to $1,100 in a year.
The second halving (2016) – 4 years later, the network of bitcoin miners have mined 420,000 blocks and activated the second bitcoin halving. During that period, Bitcoin has fluctuated between $500-$1,000 for a few months, then rose up to $20,000 by December 2017.
The third halving (2020) – After another 4 years, Bitcoin has halved once again in May 2020. At the time, Bitcoin token trading was around $9,000, but it eventually rose to $20,000 in December.
Importance of Bitcoin Halving
With the explanation of the different aspects of Bitcoin Halving, many are curious as to why Bitcoin halving needs to happen. Some even question the point of miners continuing to continue processing Bitcoin transactions despite the lower rewards for doing so.
Here are a few reasons why this happens:
Bitcoin halving increases Bitcoin’s value
When Bitcoin is released during a period where 210,000 blocks are added to the blockchain, it’s immediately halved to make it scarcer. Once this happens, the value of the currency rises since most people will want something rare.
More efficient mining operations
Mining requires massive amounts of energy and expensive equipment to verify new blocks of transaction and produce a hash key unique to every block.
With these in mind, the only way miners can be properly compensated for their operation costs is to increase the value of Bitcoin that usually happens when halving begins.
If Bitcoin prices don’t rise during the halving season, many miners will stop mining for tokens. To avoid this, the blockchain gives more difficult mathematical problems for miners to solve. This will then ensure a maintained mining rate of 10 minutes per block. When this occurs, there will be a decrease in electricity usage for the computers that solve the problem.
Decreases the inflation rate
Satoshi Nakamoto made Bitcoin finite in order to maintain its value by avoiding overproduction. Similar to real-world assets, if Bitcoin suffers inflation, its value and purchasing power will drop.
Meaning, as tokens become rarer, it becomes more desired by many investors—dropping its inflation rate. When this happens, Bitcoin’s value will rise and would induce bull runs.
What happens when the last Bitcoin is mined?
It takes miners 10 minutes to produce a new Bitcoin when a new block is added to the chain. If these transactions are processed successfully, miners are rewarded with BTC.
Once the last Bitcoin is mined, all the miners will still be part of the blockchain but they will no longer be incentivized for maintaining the network.
Is it time for you to buy Bitcoin?
Since 2009, there have already been 18.5 million Bitcoin tokens mined. With roughly 3 million tokens left, many speculate that Bitcoin mining will end soon. This continues every four years until all the Bitcoin tokens are mined. According to the Bitcoin network, BTC won’t run out for at least a hundred years.
Its significant growth over the past years is remarkable and is a testament to its reliability as a cryptocurrency. If you’re looking for a safe investment in crypto, there’s no better time than now to invest in the world’s digital gold.