The Bitcoin Halving - What is it and When Will it Happen?

The Bitcoin Halving is one of the most significant events in the cryptocurrency calendar. Occurring once every four years, the Halving – sometimes also called the Halvening – results in a 50% reduction in the rate at which new Bitcoin gets produced. But what actually happens when the Halving occurs? What are the consequences for Bitcoin and other cryptocurrencies?

And why did Bitcoin inventor Satoshi Nakamoto build the Halving into the Bitcoin code in the first place?

Where does new Bitcoin come from?

To understand the Halving, first you need to know a little bit about how new Bitcoin is created.

Nakamoto intended Bitcoin to be an evolving and long-running monetary system. That meant it needed a mechanism by which new currency could enter the system in a controlled and gradual way.

The solution was to offer rewards to people who helped secure the system by verifying transactions made by other users. These people are known as “miners”.

In the very early days of Bitcoin, it was possible to mine Bitcoin with a home computer. But these days it’s a fully industrial process requiring huge racks of GPU processors and vast amounts of energy.

Bitcoin transactions are compiled into “blocks”. When a block reaches 1MB of data, it gets sent to the miners in the form of a complex cryptographic equation.

The miner that solves the equation verifies the transactions in the block and is given a certain amount of Bitcoin for their efforts. The transactions are then inscribed in the shared history of all Bitcoin transactions.

Why does the Halving occur?

Nakamoto wanted Bitcoin to be immune from what he saw as the sins of the world’s central banks. In particular, this referred to the ability to print money at will, a process which deliberately devalued the currency in question.

While this can be an important tool in a crisis, Satoshi believed these all-too-human bankers couldn’t be trusted to only use their powers in an emergency. The 2008 Global Financial Crisis was a case in point.

To combat this, Nakamoto built two features into the Bitcoin code. Firstly, there is a hard-cap of 21 million Bitcoin. And secondly, there is a process whereby the issuance of new Bitcoin would slow down over time.

These two innovations meant that Bitcoin’s issuance would be predictable, controlled and free from the whims of the humans who use it.

What happens when the Halving occurs?

The answer may seem obvious – the amount of new Bitcoin is reduced by 50% – but the consequences are far-reaching.

The first effect is that fewer Bitcoins enter the market. When Bitcoin was launched in 2009, each block generated 50 BTC for the successful miner. Now, three Halvings later, that’s been reduced to 6.25 BTC, or 900 Bitcoin per day.

After the next Halving – due April 20, 2024 – the number will drop to 3.125 BTC, or 450 Bitcoin per day.

That means demand and supply need to find a new balance, which historically has resulted in a medium- to long-term price increase. The second effect is that the profitability of mining Bitcoin is immediately halved. This can have a significant impact on the Bitcoin mining industry.

Inefficient operators or those without sufficient financial buffers can be forced to close down, in a process known as “miner capitulation”.

Predicting Bitcoin price after the Halving

There can be significant price volatility after a Halving. Previous Halvings have seen price drops of 30-50% shortly before or after the Halving event.

While it’s hard to pinpoint the exact reason that this might occur, it’s probably some combination of increased supply due to miner capitulation, mixed with increased trading activity and the need to flush leverage out of the system.

At the end of the day, the Halving is the most predictable event in finance. If an outcome seems pre-ordained (less Bitcoin = higher price), the market will almost always find a way to move in the other direction.

How does this affect other cryptocurrencies?

Technically the Halving doesn’t have any effect at all on other cryptocurrencies. As the first blockchain, Bitcoin has no connection to or dependency on any other network.

But in the tightly connected reality of the crypto market, anything that affects Bitcoin has a trickle-down effect on everything else.

Historically, the Halving has prompted increased attention, activity and eventually price for Bitcoin. This has led to similar and often larger price increases across the cryptocurrency market. However, the converse is also true – when the Bitcoin price collapses, altcoins tend to do even worse.

Why will miners verify transactions when all the Bitcoin has been mined?

Of that 21 million Bitcoin hard-cap, almost 19,700,000 Bitcoin have already been created. By the time the last Bitcoin is produced, somewhere around 2140, miners will only be receiving 1 Satoshi, or 0.00000001 BTC per verified block.

Even in the most optimistic projections, it’s hard to see that a single Bitcoin will be worth the tens of billions required to make mining these Bitcoins a worthwhile endeavour.

Transaction fees and demand

Transaction fees will be more important in the future. When you send a transaction to the blockchain to be verified, you have to pay a fee to the miners to have your data included in the next block. When the network is under heavy demand, these fees can increase significantly.

During the April 2021 trading frenzy – when Bitcoin first passed US$60,000 – the average price to perform a Bitcoin transaction reached US$60.

When mining rewards become less significant, it’s expected that transaction fees will be the primary way of getting miners to secure the network.

While this could result in eye-watering fees, fewer and fewer transactions will occur on the primary Bitcoin network. Instead so-called Layer 2 protocols, such as the Lightning Network, will become the way that everyday people transact in Bitcoin. The original Bitcoin layer will be reserved for significant transfers that require the added layer of security.

Bitcoin Halving: Conclusion

The Bitcoin halving is a pivotal event that occurs approximately every four years, reducing the block reward for miners and maintaining the scarcity of new Bitcoins. As we approach the next halving, investors are watching for its impact on prices and the continued evolution of the cryptocurrency landscape.