Bitcoin halving refers to an event in which Bitcoin's block rewards are halved. By design, Bitcoin's block rewards automatically shrink by half around every four years. This means that the Bitcoin rewards that miners receive are halved, thus slowing down the supply. This mechanism aims to curb Bitcoin's inflation and drive up its value.
Introduction
Historical Bitcoin halvings
The halving mechanism was coined by Satoshi Nakamoto in the Bitcoin whitepaper titled "A Peer-to-Peer Electronic Cash System".
He stipulated that Bitcoin would undergo a process known as "halving" approximately every 210,000 blocks. This process continues until the maximum supply of 21 million Bitcoin is reached, which is projected to occur around 2140.
Bitcoin was launched in 2009. Since then, it has gone through three halvings, meaning the block reward has been reduced three times. The first Bitcoin halving took place in November 2012, bringing down the reward from 50 BTC to 25 BTC. The second Bitcoin halving in July 2016 reduced the block reward further to 12.5 BTC. The most recent Bitcoin halving in May 2020 reduced the block reward even further to 6.25 BTC. The halving mechanism is critical to Bitcoin's scarcity and inflation, ensuring that its total supply never exceeds 21 million, in line with its deflationary principle.
The next Bitcoin halving is expected to take place in April 2024, at a block height of 840,000. By then, Bitcoin's block reward will drop to 3.125 BTC.
How does the halving affect the price of Bitcoin?
The implications of Bitcoin halving are usually seen as positive. The basic economic principle of supply and demand explains such implications. Bitcoin halvings reduce the block reward and slow down the supply of new Bitcoin, while demand usually remains constant or even increases. If supply decreases while demand remains constant or increases, then the price increases. The prior three Bitcoin halvings have historically been associated with significant price increases. Bitcoin's price surged by 8450% in 2012 after the first halving, increased by 2900% in 2016 after the second halving, and rose by 560% in 2020 after the third halving. Halvings may boost market confidence as they add to Bitcoin's scarcity. Investors may pour more assets into the Bitcoin market to snap up more Bitcoin, which will drive up the price. Additionally, halvings are likely to attract more media and public attention, further increasing the demand for Bitcoin.