How It Works and Why It Matters – Forbes Advisor INDIA

The available supply of fiat currencies rises and falls under the watchful eyes of national central banks, but the total supply of Bitcoin is fixed and immutable.

There will only ever be 21 million Bitcoin. Presently, more than 19 million Bitcoins have already been mined, leaving under 2 million left to be created. The Bitcoin protocol periodically reduces the number of new coins earned by miners in a process called halving.

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“One of the most important features of Bitcoin is its limited supply and issuance mechanism,” says Bruce Fenton, CEO of fintech company Chainstone Labs.

Halving’s role in controlling the supply of new Bitcoins is one of the reasons the world’s most popular cryptocurrency is seen as a store of value that’s more akin to gold than a fiat currency.

What Is Bitcoin Halving?

Bitcoin halving is when the reward for Bitcoin mining is cut in half. Halving takes place every four years.

The halving policy was written into Bitcoin’s mining algorithm to counteract inflation by maintaining scarcity. In theory, the reduction in the pace of Bitcoin issuance means that the price will increase if demand remains the same.

At the moment, Bitcoin has an inflation rate of less than 2%, which will decrease with further halvings, says David Weisberger, CEO of trading platform CoinRoutes.

“Bitcoin’s production scarcity is what defines its finiteness, and when reward goes down, supply is constrained,” says Chris Kline, chief operating officer of Bitcoin IRA. “Increasing demand at a time when supply is constrained has a positive impact on price, which can make Bitcoin alluring to investors.”

How Does Bitcoin Halving Work?

A decentralized network of validators verify all Bitcoin transactions in a process called mining. They are paid 6.25 BTC when they are the first to use complex math to add a group of transactions to the Bitcoin blockchain as part of its proof-of-work mechanism.

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At the current Bitcoin price, 6.25 BTC is worth about $193,750, a decent incentive for miners to keep adding blocks of Bitcoin transactions running smoothly.

Those blocks of transactions are added roughly every 10 minutes, and the Bitcoin code dictates that the reward for miners is reduced by half after every 210,000 blocks are created. That happens roughly every four years in periods that are often accompanied by heightened Bitcoin price volatility.

When Is the Next Bitcoin Halving?

The Bitcoin algorithm dictates halving happens based on a certain creation of blocks. Nobody knows exactly when the next halving will occur, but experts point to May 2024 as an anticipated date. That would be almost exactly four years since the last one.

The somewhat predictable nature of Bitcoin halvings was designed so that it’s not a major shock to the network, experts say.

But that doesn’t mean there won’t be a trading frenzy surrounding Bitcoin’s next halving.

“Historically, there is a lot of Bitcoin price volatility leading up to and after a halving event,” says Rob Chang, CEO of Gryphon Digital Mining, a privately held Bitcoin miner. “However, the price of Bitcoin typically ends up significantly higher a few months after.”

While there are many other factors influencing Bitcoin’s price, it does seem that halving events are generally bullish for the cryptocurrency after initial volatility eases.

Richard Baker, CEO of miner and blockchain services provider TAAL Distributed Information Technologies, says investors should be cautious about the next Bitcoin halving. Although scarcity can drive price appreciation, reduced mining activity could cause the price to level off.

“The key point for investors to consider, however, isn’t the specific dates of halving events but to focus on the growth of the network overall,” Weisberger says. “As long as the network continues to grow, the likelihood of Bitcoin fulfilling its potential as a global store of value increases.”

When Was the First Bitcoin Halving?

The first Bitcoin halving occurred in November 2012. The next halving was in July 2016, and the most recent halving was in May 2020.

The reward, or subsidy, for mining, started out at 50 BTC per block when Bitcoin was released in 2009. The amount drops in half each time a new halving takes place. For instance, after the first halving, the reward for Bitcoin mining dropped to 25 BTC per block.

The last halving will occur in 2140. At that point, there will be 21 million BTC in circulation and no more coins will be created. From there, miners will just be paid with transaction fees.

Baker points out that miners may shift transaction processing power away from BTC once the next halving takes place as they seek more transaction fees elsewhere to make up for lost Bitcoin revenue.

Fewer miners would mean a less secure network, experts say.

On the other hand, while the halving reduces the reward for miners, it equally lowers the supply of new coins without reducing the demand, notes Patricia Trompeter, CEO of cryptocurrency miner Sphere 3D Corp.

“If the economic theory holds true, which historically for Bitcoin it has, Bitcoin prices should increase dramatically in response to the supply shock,” she says. “Although, there is still debate on whether the historical price movement around each halving was a direct product of the halving.”

Higher prices would be an incentive for miners to keep processing Bitcoin transactions.