Bitcoin halving, or popularly referred to as ‘halvening’, is one of the significant events in the life cycle of this leading cryptocurrency. The last halving happened in May 2020, marking what would be the third halvening since Bitcoin’s debut. Most stakeholders in the crypto community look forward to it, although it only happens once in four years. What is so exciting and fascinating about this event? This article will get into the details of Bitcoin halving and the technicals behind this fundamental process.
Over a decade in existence, a lot has been happening within the crypto world. It is now a $2+ trillion market cap with over 6,000 crypto assets trading on both centralized and decentralized exchanges as of press date. While all this action continues, the debate around Bitcoin’s halving remains one of the most popular topics and probably a good prediction metric - according to the bulls who predict that this repetitive event will send Bitcoin’s price to the moon as supply dwindles.
Bitcoin’s halving is a pre-programmed event that reduces the miners’ block reward subsidy (BTC amount miners earn for each block solved) by 50%. Miners are the nodes that process Bitcoin transactions, hence creating or adding a block to this blockchain. The mining process of Bitcoin requires high computational power, which means that corporations or individuals have to spend a lot of resources to be part of it. In return, the miners are rewarded with Bitcoins for each block that is solved - the current block reward is 6.25 BTC after it halved from 12.5 BTC in May 2020.
Bitcoin has a supply limit of 21 million coins, a fundamental that has earned it the status of ‘digital gold’. Analogous with the gold mining process, it is the role of Bitcoin miners to bring new coins into production. So far, over 18.6 million coins have already been mined, translating to around 88% of the total Bitcoin supply. This is not to say that Bitcoin’s mining is close to over - in fact, it might take another 120 years before the last coin is mined. A simple explanation to why this is possible is the Bitcoin halving process.
The halving occurs after every 210,000 blocks have been added to the Bitcoin blockchain - one block is added in approximately 10 minutes, although this rate can change to increase or slow production. This is determined by the difficulty rate (how fast bitcoin mining machines solve computations for additional blocks). The difficulty rate pre-coded algorithm maintains the production of one block within 10 minutes - making it easy to predict that the halving will occur after every four years. Approximately the time it takes to mine 210,000 blocks.
The first Bitcoin halving took place in November 2012 where the block reward subsidy dropped from 50 BTC to 25 BTC. It was then followed by 2016 halving with block rewards falling to 12.25 BTC. The most recent halving of May 2020 later reduced the BTC block reward subsidy to 6.25 BTC. For anyone who has been a Bitcoin enthusiast long enough, these three events marked significant milestones in the growth of the crypto market.
For starters, Satoshi’s inflationary theory on Bitcoin’s tokenomics seems to have been validated by BTCs price after each halving. The pseudonymous Bitcoin creator who disappeared in 2011 had shared an email stating that the technology almost guarantees its inflationary nature. However, this is capped at around 35% because block reward subsidies reduce after every 210,000 blocks. Ideally, Bitcoin’s supply has been diminishing since the genesis block was mined in January 2009. At the time, the block reward was 50 BTC. Notably, Satoshi Nakamoto mined this first block - it is not clear whether they are individuals or groups.
Looking at Bitcoin’s price over the years, the halving theory of reducing supply seems to be in line with Satoshi’s intended tokenomics. In 2011 November, the price of Bitcoin was at around $2.54 - this was one year before the first halving. The price would later skyrocket to $1,007.39 in November 2013 - a year after the 2012 halving. Similarly, Bitcoin’s price shot up after the 2016 halving to hit all-time highs of $20,000 in December 2017. We are now at $54,000 per Bitcoin - one year down since the May 2020 halving, and of course, the most recent one.
While the tokenomics makes sense, it is also noteworthy Bitcoin’s price action has largely been influenced by the high adoption rate in recent years. A trend that is likely to go higher should the supply continue to reduce as demand increases.
Besides tokenomics, Bitcoin’s halving a crucial part of its decentralized architecture. This process helps maintain network security and prevent miner concentration, which could cause a 51% attack (reversal of transactions or double-spending when malicious actors take over 50% of the network).
One of the most outstanding achievements in Bitcoin’s protocol is its network security - a decentralized ecosystem where the protocol rewards miners. Contrary to centralized networks, Bitcoin is controlled by multiple actors who contribute to mining new blocks, making the network decentralized at any point in time. This being the case, it takes a lot of computational power to undo a block once added to the blockchain.
The incentivization model was also a breakthrough in achieving a secure network as miners depend on the rewards to cover their computational cost and generate additional income. Furthermore, the miners can only cover this cost if BTC is valuable - another incentive to ensure that the network remains secure and running.
As previously mentioned, Bitcoin mining is an expensive activity given the amount of energy it consumes. Nonetheless, miners have found a way of pooling their resources to mine new blocks faster - they do so by joining a ‘mining pool’. This lowers their maintenance costs, leading to an increase in income after the block rewards are shared out. Though an efficient way of increasing profits, sceptics have said that it could lead to a 51% attack vulnerability.
Of course, there is a probability that it could happen, but this chance grows slimmer as Bitcoin mining becomes more diversified. Initially, most of the mining power was concentrated in China due to the cheaply available hydroelectric power. The trend is now shifting as miners in other jurisdictions like the U.S and Canada double down on BTC mining. In theory, it is harder for 100 miners to collude as opposed to 10 miners.
As per the current schedule, the last Bitcoin block will be mined in 2140. This means that miners are still posed to receive block reward subsidies for a considerable future - but what happens when all the coins are depleted? Will the miners still be motivated to maintain the network security? This question is still a huge debate that can only be conclusively resolved when the last block is mined.
However, the miners will still receive transaction fees paid by users who will send or receive Bitcoin through its network. Based on this structure, the survival of Bitcoin’s price after the last block is mined will depend on whether it is a valuable and mainstream asset. That way, the network will be able to generate sufficient fees to cover miners’ rewards.
As we have seen, Bitcoin halving is a fundamental part of its tokenomics and security infrastructure. The next halvening is likely to occur in 2024, where the block rewards will reduce to 3.125 BTC - pushing its supply further down. While the block rewards will have reduced, the price of one Bitcoin might be much higher than it is today, which means that miners will still be compensated adequately once they sell their Bitcoins in OTCs or exchanges. So far, the Bitcoin tokenomics model seems to be holding well - only time will prove its resilience.