What is a Bitcoin Halving?

A halving is an event that reduces the amount of bitcoin (BTC) entering circulation through the bitcoin mining process. With the Bitcoin protocol, halvings that take place approximately once every four years.

Bitcoin white paper author Satoshi Nakamoto instituted halving events as a way to automatically reduce the amount of newly created bitcoin entering circulation over time. The halving process has continued on without human involvement since Nakamoto produced the bitcoin genesis block.

Block reward halvings are one of bitcoin's most innovative features. Many economists feel this system, coupled with its maximum 21 million coin supply, is what makes bitcoin a superior store of value. Once the protocol hits this number, no more bitcoin can be mined.

To best understand halvings, we must first look at how bitcoin is fundamentally different to government-issued currencies like the US dollar.

The monetary policies that govern government-issued national currencies are subject to change based on the discretion of a central authority. These are often a country's central bank or government. Monetary policy is the way by which a central bank controls the amount of money that exists within the economy.

Using monetary policy, governments can modify their money supply by creating units of currency as they see fit. To avoid defaulting on their debts, governments have often chosen to increase their money supply. Increasing the money supply allows governments to use newly created currency to fulfill their past debt obligations.

The process of creating new units of currency (increasing the money supply) is said to debase the currency. Debasement refers to a reduction in the amount of goods people can purchase with each unit of currency. In economics, this concept of how many goods can be purchased for a unit of currency is known as purchasing power.

Creating many new currency units and releasing them into circulation can also drive inflation. Inflation is an increase in the prices of goods and services across an economy.

So, how is bitcoin different?

Unlike fiat currencies, bitcoin is a fully decentralized and programmatically controlled financial protocol. No single government, central bank, or crypto holder can override the rules of bitcoin or decide for themselves how the protocol should operate.

New units of bitcoin are issued based on a fixed schedule that Bitcoin's anonymous creator, Satoshi Nakamoto, programmed into the protocol when it first launched. These rules are hard-coded into bitcoin's source code and are difficult to change without a majority consensus from all nodes on the network.

Nakamoto coded a programmatic halving system into Bitcoin's source code to automatically taper the amount of new bitcoin released as block rewards.

This system happens once every 210,000 blocks and has continued to autonomously manage bitcoin's issuance schedule since.

The protocol activated the first bitcoin halving event on November 28, 2012, and saw bitcoin block rewards decrease from 50 BTC to 25 BTC.

There have been a total of three halving events since Bitcoin's launch and the period between halvings is called a halving cycle. The previous halving took place on May 11, 2020. The block reward was halved from 12.5 BTC per block to its current rate of 6.25 BTC per block.

The next halving is expected to take place sometime in the year 2024. The protocol will halve the bitcoin mining rewards again to 3.125 bitcoin per block for the following 210,000 blocks.

The bitcoin block reward will continue to halve until the number of bitcoins in circulation reaches the maximum supply of 21 million. Currently, over 90% of bitcoin's total supply has already entered into circulation. Because of the halving schedule, the blockchain will release the remaining 2 million coins over a significantly longer period of time.

It is important to note that only the newly created bitcoin part of the block reward gets repeatedly halved over time. Some using bitcoin may choose to include additional amounts of bitcoin with their transaction as an incentive for miners to include their transaction earlier. This additional fee that senders may choose to send to miners doesn't cut in half along with the block reward.

A process called mining both verifies bitcoin transactions and controls bitcoin issuance.

Bitcoin mining is a cryptography-based competition that involves computer operators — known as miners — using purpose-built computing equipment.

Only one miner can win each round of the competition, and new rounds run every ten minutes.

Each time a miner wins, they gain the right to commit a new block of pending transactions to the Bitcoin blockchain. The winning miner also gets a reward for mining a block — known as a block reward.

This block reward consists of an amount of newly minted bitcoin, plus any transaction fees the sender wishes to include with the transaction.

The bitcoin halving process reduces that amount of newly minted bitcoin by half each time it occurs.

From a historical perspective, dramatic rises in price have followed after each of the last three bitcoin halvings.

• #1: 9,520% rise over the following 365 days.
• #2: 3,402% rise over the following 518 days.
• #3: 652% rise over the following 335 days.

From this, the mean average time before prices peak after a halving is around 406 days.

Of course, past performance is no guarantee of future results, and while many believe halvings are the fundamental catalysts for these rallies we cannot know definitively if this is the case. 

It has been frequently estimated that the last bitcoin will enter into circulation in the year 2140.

If that is correct, it means that there should, theoretically, be at least 29 more halving events between now and then.

Nakamoto implemented halvings on the Bitcoin network to control the inflation rate of its native cryptocurrency. This process is completely different from the rate at which government-issued currency enters into circulation. 

In fiat economies, supplies can dramatically increase (or decrease) at a moment's notice based on the decision of a central bank. In these instances, millions of new units of a currency may enter (or exit) the market whenever domestic governments think it necessary.

Bitcoin simply does not have the functionality to allow a single entity to change its issuance system.

Because of this, many see bitcoin as a more resilient form of money. One that is not subject to the same centralized interventions seen in central bank-controlled currencies.

Halvings represent one of bitcoin’s most exciting and innovative features.

Not only have they seemed to have repeated positive impacts on its market price, but their predictability and transparency are key factors that distinguish bitcoin from fiat currencies and all other types of assets.

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