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What is Bitcoin Halving? Why It Matters

Bitcoin halving is an event that fundamentally shapes Bitcoin's scarcity, supply, and deflationary nature. Learn how it works and why it matters.

Tio

Posted October 31, 2023
Last updated October 31, 2023

Bitcoin in a blue pot with arrows pointing up on each side
Bitcoin in a blue pot with arrows pointing up on each side

The world of cryptocurrencies is constantly evolving, and Bitcoin stands at the forefront of this revolution. While Bitcoin’s rise to prominence is well-documented, one of the lesser-known but critically important aspects of this digital currency is the phenomenon known as Bitcoin Halving. 

This event, occurring approximately every four years, has significant implications for the Bitcoin ecosystem, its price, and the broader crypto market.

In this article, we’ll break down what Bitcoin Halving is, why it matters, and how it has influenced Bitcoin’s price in an easy-to-understand way.

Key takeaways

  • Bitcoin Halving is a built-in protocol that reduces the rate at which new Bitcoins are created approximately every four years. 
  • Halving is designed to maintain Bitcoin’s scarcity by the reducing block reward by half to control inflation, making Bitcoin a deflationary digital asset.

What is Bitcoin Halving?

As prefaced above, Bitcoin Halving is a built-in mechanism embedded in Bitcoin’s blockchain protocol.

Essentially, this halving protocol is designed to control the supply of Bitcoin by reducing the rate in which new coins are minted, therefore lowering the available amount of new supply.

In simpler terms, Bitcoin Halving is the event when the number of new Bitcoins generated with each block of transactions is reduced by half. 

That being said, this finite and diminishing minting of Bitcoin creates a fixed monetary supply that resists inflation. 

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This is different from fiat currency, where governments can theoretically print an infinite number of bills by a central bank.

When did the last Bitcoin Halvings happen?

  • November 28, 2012: reduced to 25 Bitcoins minted for each block.
  • July 9, 2016: reduced to 12.5 Bitcoins minted for each block.
  • May 11, 2020: reduced to 6.25 Bitcoins minted for each block.
Illustration of Bitcoin halving over the past few years

The next bitcoin halving is expected to occur in eary-to-mid 2024, where it will once again reduce the mining reward to 3.125 Bitcoins per block.

New to Bitcoin? Learn all about Bitcoin in our complete guide.

Why Bitcoin Halving Matters

To appreciate the significance of Bitcoin Halving, it’s essential to also comprehend the core mechanics of Bitcoin mining. 

Miners, individuals or groups with specialized hardware, compete to solve complex mathematical problems. 

The first one to solve the puzzle gets to validate a block of transactions and is rewarded with newly created Bitcoins and transaction fees. Bitcoin Halving directly impacts this reward structure, and reduces it in half every 4 years.

Illustration of Bitcoin ecosystem

So, what are the implications of Bitcoin Halving?

Supply and Demand Dynamics

Bitcoin Halving plays a pivotal role in shaping the supply and demand dynamics of this cryptocurrency. 

With a reduction in the number of new Bitcoins generated, the supply becomes scarcer, potentially leading to increased demand.

Inflation Control

As mentioned above, unlike traditional government-printed fiat currencies, Bitcoin is not susceptible to inflation caused by excessive printing. 

Only 21 million Bitcoins will ever be created, making it a deflationary asset in contrast to fiat currencies subject to inflation. Bitcoin halving ensures that new Bitcoins are introduced into the market at a decreasing rate. This scarcity makes each Bitcoin more valuable over time.

Long-Term Viability

By controlling inflation and gradually increasing scarcity, Bitcoin Halving is seen as a mechanism to ensure the long-term sustainability and longevity of the cryptocurrency. 

This halving protocol is also the reason why many have compared Bitcoin to digital gold, due to its deflationary nature.

Fun fact: The final Bitcoin Halving event is expected to occur approximately in the year 2140, when the number of circulating Bitcoins will reach the theoretical supply of 21 million. After 2140, there will be no new Bitcoins issued.

Historical Impact on Bitcoin’s Price

Bitcoin Halving events have historically had a substantial impact on its price. The previous two halvings, which took place in 2012 and 2016, were followed by significant price surges. 

This pattern is attributed to the supply reduction and the psychological impact it has on investors and traders.

In the months and years following the first Bitcoin Halving in 2012, the price of Bitcoin skyrocketed from mere cents to over $1,000 in 2013. 

Illustration of Bitcoin price and wallet going up

The 2016 Halving also witnessed a remarkable price increase, with Bitcoin hitting an all-time high of nearly $20,000 in December 2017.

It’s important to note that while Bitcoin Halving historically correlates with price increases, it doesn’t guarantee them. 

The cryptocurrency market is influenced by a multitude of factors, and market behavior can be unpredictable.

Market Speculation

The anticipation and aftermath of Bitcoin Halving often trigger speculative activity in the cryptocurrency market, impacting its price. 

Historically, the halving event has consistently been observed to have a significant impact on Bitcoin’s market price, as well as the crypto market in general.

Bitcoin Halving Takeaways

To conclude, halving maintains Bitcon’s scarcity, and therefore facilitates its deflationary behavior.

It highlights the unique nature of Bitcoin as a digital asset and its potential to disrupt traditional financial systems. 

Blue Bitcoin 3D image

That aside, the halving event is also the time when all eyes are drawn to not only Bitcoin, but also the crypto space in general.

Halving events have been observed to disrupt the market as Bitcoin’s value starts to shift. 

As Bitcoin halving continues to shape the future of cryptocurrency, it’s a fascinating journey that beginners and enthusiasts alike can embark upon. 

Stay curious, stay informed, and remember that the world of cryptocurrency holds many more surprises waiting to be uncovered!

Further reading: Explore our hub for all things crypto.

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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.

Last updated October 31, 2023

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