To understand the halving, you need to understand what is being halved and why. For that we need to discuss Bitcoin mining.
Bitcoin mining
Bitcoin mining is the process computers on the blockchain network use to verify new transactions to ensure the accuracy, immutability and ultimately the security of the entire network. These computers are called miners and the mining process requires miners to follow a proof-of-work consensus protocol where computer processing power is used to solve and create cryptographic hashes (maths problems) which link blocks of transactions together.
New blocks of transactions have a unique hash from the previous block. To get published to the Bitcoin Blockchain Ledger it requires the creation of another unique hash which will go through a validation process and then get passed on to the next block and so on and so forth.
To create a new cryptographic hash for the block of transactions, miners compete with each other, using computer power to try to be the first one to come up with the hash. Without getting too technical with details of the mining process, the miners are rewarded with Bitcoin each time they verify a new block of transactions. The mining rewards are a combination of, One; newly minted Bitcoin that were not previously in circulation and Two; transaction fees of Bitcoin already in circulation. These rewards are in place to incentivise miners to participate in the mining process, to ensure the Bitcoin network continues to be audited and essentially maintained.
Bitcoin Supply
The more we learn about Bitcoin, the more similarities we see between Bitcoin and gold. This is because Satoshi Nakamoto, the unknown person or group of people who created Bitcoin, developed the digital currency to intentionally harbour characteristics of the precious metal gold.
We recognise this in the Bitcoin mining process, we prospect for new gold deposits, building out a mine, and operating a mine to extract gold is laborious, similar to the immense computing power required by Bitcoin miners who perform guesswork to create new unique hashes to validate new blocks of transactions.
Another gold like characteristic Satoshi programmed into Bitcoin is a maximum supply. The total amount of Bitcoin that can ever exist is 21 million units. This maximum 21 million units was established to mirror gold's stable inflation rate. One way to understand this concept is to consider, in the future, when new gold becomes extremely rare and mining costs increase until it becomes too expensive to mine new gold, resulting in the current supply of pre mined gold increases in value over time since new gold cannot be created.
This is the same idea with Bitcoin, because over time with a fixed supply and increased demand, the value of Bitcoin will increase. In the traditional context of inflation, Bitcoin is slightly and predictably inflationary because the supply of Bitcoin is increasing as miners mint new Bitcoin through validating new blocks of transactions, which will continue until the maximum supply is reached which will drop its inflation rate to zero.
At the time of writing this, around 19.3 million Bitcoin are currently in circulation of the 21 million total supply. According to Bitcoin Tracker the last Bitcoin will be mined in the year 2140, which is about 117 years from now. So, in our lifetimes the supply of Bitcoin will continue to increase therefore being slightly inflationary.
Bitcoin Halving
The Bitcoin halving refers to a reduction in Bitcoin block rewards issued to minors by half. Currently the block reward for miners is 6.25 newly minted Bitcoin that were not previously in circulation. When the next halving occurs in early/mid 2024 the block reward will decrease by half, which will give minors only 3.125 of newly minted Bitcoin per validated block.
Bitcoin halving’s are programmed into the protocol to occur every 210,000 validated blocks. Since a new block of transactions is completed roughly every 10 minutes, this works out to an average Bitcoin Halving every four years with the most recent one occurring back in May 2020.
When Bitcoin was first developed in 2009, the block reward was 50 Bitcoin. Then in 2012 the first halving event reduced the block reward to 25 Bitcoin. In 2016 the second halving reduced the block reward to 12.5 Bitcoin and in 2020 the block reward reduced to the current 6.25 Bitcoin per validated block.
So why do Bitcoin halving’s occur? Well, Satoshi Nakamoto programmed the halving of newly minted Bitcoin every 210,000 blocks to prevent inflation from decreasing the purchasing power of Bitcoin. Satoshi also factored in the increase of technological advancement over time into bitcoins algorithm so the faster new blocks are validated the more difficult creating hashes for new blocks becomes.
Halving the amount of newly minted Bitcoin in segments, controls the rate at which the finite supply Bitcoin is entered into circulation overtime. At the current block reward of 6.25 Bitcoin which occurs roughly every 10 minutes about 900 new Bitcoin are minted daily, making the inflation rate about 1.8% annually. This means Bitcoin is much less inflationary than the US dollar. Similar to gold, this creates a predictable and constantly decreasing inflation rate that unlike gold will eventually reach 0%.
What happens after the halving?
What are the implications of Bitcoin halving events? Gold has been considered one of the best stores of value because of its limited supply and difficulty to produce, making it scarce. When comparing this to Bitcoin’s fixed supply imposed by it’s algorithm, Bitcoin was actually designed to be scarcer than gold. So, if demand remains steady or increases for the fixed scarce supply of Bitcoin, which it has been during these unprecedented macroeconomic times, the price of Bitcoin will more than likely experience positive long term effects. Then after the halving in early 2024 the supply of Bitcoin will become even scarcer.
Let's explore what has happened to bitcoins price following the previous halving events. Back when the first Bitcoin halving occurred in 2012, Bitcoin was around $11.00. Then one year later in 2013 Bitcoin spiked to around $1100, the highest Bitcoin had ever been at that time. Then, after the crypto winter, Bitcoin had it’s second halving in July 2016. Bitcoin was around $600 and about 18 months later, near the end of 2017 it spiked to $20,000 before dropping down to around 3000 during 2019. The most recent halving event happened in May of 2020, in the midst of some unusual times due to the pandemic. Bitcoin was about $8000 when the halving occurred and then about one year later in April 2021 hit $63,000 and then it's ultimate all-time high in December 2021 of around $69,000. It then dropped back down to around $15,000 by the end of 2022.
Historically, in the months immediately following a halving event, Bitcoin pricing doesn't show much movement. It usually started heating up around 12 to 18 months after halving. Once that parabolic move happens, as long as you bought the dip, there are gains to be made that could create generational wealth.
Disclaimer - None of what is written on this website is financial advice and only descriptions of how the author trades and for entertainment purposes.
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