Bitcoin Mining: Why Halving Matters

Halving means reducing by half, and referring to Bitcoin mining means precisely the halving of the reward for miners. 

Halving is of utmost importance to the Bitcoin protocol, because it is in fact BTC’s only monetary policy measure, and it is what gives Bitcoin its deflationary nature. 

In fact, the premium given to miners is the only way there is to create BTC. 

This premium is encoded in Bitcoin’s code, as is also its halving. Thus halving is a process intrinsic to the Bitcoin protocol, and immutable. 

In addition to being immutable, it is also predictable, and the sum of all this gives Bitcoin’s deflationary nature. 

The beginnings of Bitcoin mining: full rewards for miners and no halving

Initially, when the Bitcoin protocol was published on 31 October 2008, there was no BTC, and there was no way to create them. 

The protocol initially provided for 50 BTC to be given as a reward for each block mined. So the first 50 BTC were created when the first block of Bitcoin was mined, on 3 January 2009. 

The second block was not mined until 9 January, with another 50 BTC given as a reward to the miner who mined it. At that point, only 100 BTC existed in total. It is worth noting that those first blocks were mined by Satoshi Nakamoto himself, i.e., the creator of Bitcoin. 

Since then the speed at which a new block could be mined has increased, reaching close to the theoretical average of 10 minutes. So about 6 blocks were being mined per hour, or 144 per day. Since 50 BTC were created per block, about 7,200 BTC were created and distributed as prizes to the miners every day. 

At that time there were already other miners besides Satoshi, and the market value of the BTC thus created was essentially zero. 

By the end of 2009 more than 1.6 million BTC had already been created in this way, because in reality, the average time to mine a block (the block-time) was well under 10 minutes. 

By the end of 2010, a total of nearly 5 million had already been created, and by the end of 2011 nearly 8 million. At that time 1 BTC had come to be worth about $4, so Bitcoin capitalized about $32 million. 

The first halving

On 28 November 2012, the first halving took place. In other words, the Bitcoin protocol automatically halved the reward for miners to 25 BTC per block. 

This also halved the rate at which new BTC were created, since while maintaining the pace of about one new block every 10 minutes, about 7,200 BTC were no longer created each day but 3,600. 

It must be kept in mind that within the Bitcoin protocol the rule that handles halving mandates that it occurs every 210,000 mined blocks. In fact, on 28 November 2012, it was precisely the block number 210,000 that was mined that triggered the first halving. 

Most likely, precisely because of the halving of the creation of new BTC, the following year the price of BTC soared to a new all-time high at over $1,100. 

Since the halving effectively halves the inflation of the Bitcoin money supply, it is more than logical to expect that it can have a positive effect on the price of BTC because it reduces its selling pressure. 

Mining activity and the relationship to Bitcoin halving

Indeed, at the root, there is a problem that can only be solved by selling mined BTC in the market. 

Mining is a competition, in which the prize is awarded to the individual miner who succeeds first in mining a block. All the other miners who were trying, but arrived later, get nothing. 

This competition is won through sheer computing power, which for Bitcoin is called hashrate. In other words, the more computing power a miner has (hashrate) the greater their chances of collecting the reward. If they have too little, they will never be able to mine any block, and they will never collect any reward. 

This pushes miners to have as much computing power as possible, but in doing so the machines that deliver it end up consuming large amounts of electricity. 

As one can easily imagine, such a process generates high costs, which generally have to be paid for in fiat currency. Since the only proceeds from the mining process are BTC, mined BTC must be sold to cash in fiat currency to finance this expense. 

It is not necessarily the case that miners are forced to sell all the BTC they collect from mining, but they are still likely to be forced to sell most of them, especially when their market price is low. 

On 27 November 2012, about 7,200 BTC were still being mined per day, and each BTC had a market value of about $12. So it is possible to imagine that each day the miners were trying to collect a total of up to about $86,000 by selling the mined BTC. 

From the next day, these figures suddenly were halved, with the reduction to 3,600 BTC created per day, with a market value of $43,000. This reduced the selling pressure of BTC in the market. By December the value of BTC had risen to $13 and by January to $14. 

The subsequent halvings: how does Bitcoin mining change

Bitcoin’s second halving occurred at block number 420,000, mined on 9 July 2016. 

At the time, the market value of one BTC was about $670, and although it dropped in August, by November it had risen to $700. 

Even then, a large speculative bubble was triggered the following year, bringing the price of Bitcoin to about $20,000 in December 2017. 

It is worth noting that in percentage terms this second bubble was lower than the previous one in 2013. 

The third halving occurred at the 630,000 block, mined on 11 May 2020. 

At that time, the market value of a BTC was about $10,000, and it continued to hover around this figure until October of that year. 

November 2020 triggered Bitcoin’s last major bullrun that ended a year later when it reached a new all-time high at $69,000. 

Again, the speculative bubble was smaller in percentage terms than the previous one. 

Bitcoin’s monetary policy

Bitcoin‘s monetary policy is precisely that. 

Namely, all BTC are always and only created through the rewards given to the miners, and every 210,000 mined blocks the reward halves. That is all. 

This monetary policy is not only immutable, it is also predictable, so much so that we already know that the next halving should take place in the spring of 2024. 

The point is that by force of halving, sooner or later the creation of new BTC will simply cease. It is worth noting that the miners at that point will no longer collect the reward, but will continue to collect the fees paid by those who make a transaction. Because of this, they will also be forced to greatly reduce their energy consumption. 

However, given that it is not so uncommon for the private keys of wallets in which BTC are stored to be lost permanently, and given that without the private keys the BTC stored in the wallet are no longer usable, it is inevitable that over time some BTC will be “lost” forever in this way. When no more new ones are created, around the year 2140, the number of BTC actually in circulation will inevitably begin to decline. 

By that time Bitcoin will have become a deflationary currency.