Every four years, the Bitcoin amount that is distributed to miners halves. This process is called Bitcoin halving. Here is why and how it works.
Bitcoin’s Supply Limit
Before discussing Bitcoin halving, let’s look at the theory behind this crypto’s supply.
Bitcoin inventor Satoshi Nakamoto was a firm believer that scarcity creates value. For this reason, he capped the Bitcoin total supply at 21 million.
The idea of setting a limit on Bitcoin supply is completely different from how fiat currencies work. Extreme financial uncertainties can cause governments to print more money to help strengthen a struggling economy.
But the Bitcoin founder believed such a move could lead to the devaluation of fiat money. To prevent that from happening to his crypto asset, Nakamoto wrote a code restricting the creation of more Bitcoin.
What’s Bitcoin Halving?
New BTC is released through mining as block rewards earned by miners maintaining and securing the network. However, after every four years, these block rewards are halved to reduce the rate at which new BTC enters the supply. Crypto analysts have said this process will end in 2140.
A Brief History of Bitcoin Halving
Bitcoin mining rewards started at 50 BTC per block in 2009. The first halving occurred in 2012, reducing mining rewards to 25 BTC. In 2016, Bitcoin miners saw a second halving, as mining rewards dropped to 12.5 BTC. The third halving happened in 2020, with mining rewards declining further to 6.25 BTC. The fourth halving is set to occur in 2024.
What Makes Halving Special?
Since Bitcoin is decentralized and not controlled by anyone, there was a need for strict rules in regard to how much BTC is to be created and how it should be released. Therefore, Nakamoto’s decision to cap total supply and include the halving event in the BTC code makes the monetary system of this crypto asset impossible to change.
What Happens to Bitcoin Miners?
Bitcoin miners have invested heavily in mining equipment and depend on mining rewards to generate returns on their investments. But what next for them after 2140?
Once the final BTC is mined, miners will only earn rewards by facilitating transactions on the network. At the moment, transaction fees account for a very small portion of the miners’ total revenue.
Today, most miners earn $24.5 million or 900 BTC a day but collect about $1.7 million or 70 BTC in transaction fees. ByBit exchange CEO Ben Zhou once claimed that the transaction fees would increase significantly after 2140 to compensate for the lost mining rewards.
It is also possible that there could be a change in Bitcoin’s reward mechanism before the last BTC is mined. Currently, Bitcoin operates on a proof-of-work (PoW) consensus mechanism, which has been criticized by many for being energy-intensive.
Rival crypto Ethereum switched from PoW to Proof-of-Stake (PoW) consensus mechanism in September 2022. Now the network is secured by validators who lock up their Ethereum on the blockchain. University College London’s Centre for Blockchain Technologies reported last year that PoS blockchains consume less energy.
Meanwhile, the founder of Swiss crypto broker Bitcoin Suisse, Niklas Nikolajsen, says Bitcoin will adopt the PoS mechanism once the technology is proven.
There has been a long-standing debate among crypto fans over whether halving events affect BTC’s price.
Historically, Bitcoin’s price has increased after every halving event.
For example, the price of Bitcoin was $661 before the halving event in 2016. After it occurred around June of that year, BTC trended upward throughout the month. It later dropped to $532 in August before increasing by 2,920% to $20,000 by December.
A similar price surge happened after the 2020 halving. Bitcoin went from $9,500 to $27,900 by the end of that year. But it is worth noting that the increase was also influenced by other factors such as Paypal’s decision to allow users to purchase and hold BTC and the growing interest from institutional investors like MicroStrategy.