What are Bitcoin halvings?
Every 210,000 blocks — approximately four years —the amount of new bitcoin issued per block is reduced to half. These events are know as halvings, and are vital to the network for several reasons.
Understanding Bitcoin’s architecture
To thoroughly explain how halvings work, it is first necessary to understand the Bitcoin network’s architecture and functioning.
Every time a user sends a Bitcoin transaction, their wallet broadcasts it to the network’s nodes, which validate it. Then, nodes send transactions to the mempool, where miners confirm it through a process called mining.
Interested in how the mempool works? Check our article below.
When miners confirm transactions, they include them into blocks, where data is permanently stored on the blockchain. Every time miners add a block to the network, they receive a reward, composed of:
- All the fees from the transactions included in that block.
- A block subsidy, which is newly minted bitcoin.
Summarizing, besides ensuring the network’s security, mining is also the process through which new bitcoin enter circulation. This is where halving comes in.
New to mining? Don’t worry! Learn the basics on our article below.
Bitcoin halvings explained
As we mentioned, halvings are the process that reduces block subsidies — and thus, new bitcoin entering circulation — by half.
Why do we need to do this? Bitcoin has a hard cap of 21 million coins, which means that’s all the bitcoin there will ever be. The network automatically reduces emission using halvings to ensure that inflation is moderate and doesn’t affect price until all coins enter circulation.
Halvings happen every 210,000 blocks exactly, or after every four years approximately. When Bitcoin went live in 2009, 50 new bitcoin were minted with every new block. Since then, three halvings have occurred, cutting the block subsidies to 25, 12.5, and 6.25, respectively, which is where we are at. In 2024, the next halving will set the amount of new bitcoin minted per block at 3.125.
The process will continue until approximately 2140, when Bitcoin will reach its maximum supply, and all the coins will be in circulation.
Halving implications in markets and mining
The Bitcoin community often expects and celebrates halvings since, in the past, every single one of them has had substantial implications for Bitcoin.
From a markets perspective, halvings significantly reduce the bitcoin supply. At reduced supply but sustained demand, bitcoin price tends to surge after every halving, kickstarting an upwards trend that lasts for months. Take a look at the picture below.
Halvings also have massive repercussions for Bitcoin mining. As we said before, miners’ revenue comprises the fees from the transactions included in a block and the new bitcoin minted after that block.
If you’re not quite sure how Bitcoin miners earn money, make sure to read our article below.
Each Bitcoin halving significantly reduces miner rewards in BTC, although that doesn’t necessarily mean that mining is less profitable.
Miners don’t pay their expenses in bitcoin. They do so in their locations’ fiat currency. So as long as halvings keep having the appreciating impact they have never failed to have on bitcoin so far, mining profitability in fiat terms shouldn’t be affected. If the price increase is more than 50%, mining may even be more profitable than before.
To sum up, we could explain the widespread impact of halvings on bitcoin as follows:
- A halving occurs, new bitcoin entering in circulation decrease 50%.
- Inflation (supply) drops. With fewer bitcoin available, people rush in to buy, also increasing demand.
- Lower supply and higher demand lead to a price increase against fiat currencies.
- Miners, who receive less bitcoin, still earn the same (or more) when converting to fiat due to BTC appreciation.
What happens when we reach maximum supply?
Once all 21 million bitcoin enter circulation, halvings will stop, and no more coins will be minted. Mining rewards will also change, as miners will receive only transaction fees.
You may be wondering why people would continue mining when rewards are drastically reduced like that. Many scenarios could still play out for Bitcoin mining to still be profitable in the future, even without block subsidies:
- Bitcoin may reach worldwide levels of adoption. The more people use Bitcoin, the more transactions they will perform, and thus, the more fees they will pay to miners.
- Additionally, when there are many pending transactions on the mempool, users often willingly pay higher fees to get prioritized. So the increase wouldn’t be only in quantity but also in quality (financially speaking).
- Finally, it’s also logical to expect that bitcoin’s price will surge when supply reaches its cap. Since transaction fees are paid in bitcoin, a nominal increase would mean miners would earn more when converting to dollars, similar to what’s happening with halvings today.
All things considered, though, it’s tough to predict what will happen in the coming years. Mining has evolved a lot since its beginnings, and it will probably keep doing so. We can only wait and see what the future holds for Bitcoin.
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