5 min read · Apr 9, 2024
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The concept of the halving is one of the most important concepts around Bitcoin. Ultimately, it’s about controlling the scarcity of Bitcoin by reducing the mining rewards over time. This article sheds light on what Bitcoin halving is, why it’s so important for Bitcoin, and what it means for the Bitcoin price.
Bitcoin was designed by Satoshi Nakamoto as a scarce digital asset, whose maximum amount is limited to about 21 million units. This limitation is anchored in the code of Bitcoin — there will never be more than 21 million Bitcoins in circulation. This predefined scarcity is one of the essential advantages of Bitcoin and contributes to Bitcoin often being referred to as “digital gold” due to a similar scarcity.
The technical implementation of a cap of 21 million Bitcoins is technically a challenge. There are theoretically various ways to implement this limit:
- One could have created 21 million BTC once at the start of the Bitcoin network and then not issue any further Bitcoins.
- Another option would have been to continuously issue new Bitcoins linearly over a fixed period until the limit of 21 million is approached, after which the issuance of new Bitcoins would be abruptly fall to zero.
- The third option, which Satoshi Nakamoto also chose, is that fewer and fewer new Bitcoins are generated over the years until the 21 million units are reached. This process leads to Bitcoin becoming increasingly scarce — and in this sense, scarcity is increased over the years. To be precise, the amount of newly “mined” Bitcoins approximately halves every 4 years. Hence the term “Halving”.
The Bitcoin supply has developed since the start of the Bitcoin system in 2008 as follows:
- Years 1–4: Miners are rewarded with 50 BTC per block
- Years 5–8: Miners are rewarded with 25 BTC per block
- Years 9–12: Miners are rewarded with 12.5 BTC per block
- Years 13–16: Miners are rewarded with 6.25 BTC per block
- Years 17–20: Miners are rewarded with 3.125 BTC per block
- This process continues until the maximum amount of Bitcoins (almost) is reached.
This systematic halving of the block reward ensures that the total amount of Bitcoins in circulation never exceeds the predetermined cap.
It is not the Bitcoin price that is halved, as some media write. Nor is the total amount of Bitcoins halved. Instead, the number of newly created Bitcoins per block is halved, which means a slowdown in the growth of the Bitcoin supply. This is ultimately essential for the scarcity of Bitcoin.
We are in the 16th year after the introduction of Bitcoin and currently, 6.25 Bitcoins per block are distributed as a reward. This corresponds to about 900 Bitcoins daily with an average discovery rate of a block every 10 minutes. This results in an annual growth rate of 1.8%, which is comming close to the growth rate of gold supply, which is estimated to be about 1 to 1.5%.
The predetermined issuance plan of Bitcoin now foresees a further halving, which is expected around April 20th. However, the exact date is not precisely predictable in advance due to the nature of Bitcoin mining, which provides for a halving every 210,000 blocks. A more accurate countdown can be viewed on the website of the Blocktrainer at https://www.blocktrainer.de/live-countdown-zum-bitcoin-halving-2024/.
After the halving, only 3.125 Bitcoins per block, or about 450 Bitcoins daily, will be newly created, which reduces the growth rate to approximately 0.9% per year — thus making Bitcoin even scarcer than gold. Looking four years into the future, the amount of newly created Bitcoins will be halved again to then 225 Bitcoins per day, which corresponds to an annual rate of 0.45%. And so on and so forth…
The maximum number of Bitcoins is expected to be reached in the year 2140, which is due to the fact that the largest part has already been created. So far, 19.7 million BTC have been mined, which corresponds to 94% of the maximum amount of 21 million Bitcoins. The gradual halving of the reward for mining asymptotically approaches the limit, so we are slowly but surely approaching the maximum possible 21 million units.
Figure 1: The Bitcoin supply over time
Source: BlockPit
Just as with gold, the newly created Bitcoins are allocated to miners. Miners are those actors in the network who confirm transactions and find new blocks. They solve complex mathematical puzzles. The first to solve the puzzle receives the newly mined Bitcoins as a reward, known as the Block Subsidy, as well as the transaction fees incurred.
The upcoming halving of the Bitcoin miner reward from 6.25 to 3.125 BTC per block could lead to miners facing lower incentives. As a result, some may cease their mining activities. This is ultimately expected, as miners have to cover their operating costs — for electricity, hardware, and the like — and mining may no longer be profitable for some of them after the Halving, which could lead to market exit.
A reduction in the number of miners is initially to be seen as negative, as it compromises the security of the system. Because the more miners are active, the more resistant the network is to attacks — we will record an extra episode on Bitcoin, Fiat & Rock’n’ Roll about this. Historical data shows that after previous Halvings, the hash rate — simply put, the computing power of the miners — often fell by 20–30% in the short term. However, the decline in hash rate was only temporary in the past, and new highs were quickly reached after the Halvings. This can certainly also be attributed to the generally increased Bitcoin price. Interestingly, the hash rate even rose during the last bear market, which was considered an extremely unexpected event. However, it is important to emphasize that these observations are based on a sample size of N=3 and therefore no causal conclusions should be drawn.
