Bitcoin (BTC) Reward Halving Explained

Bitcoin Halving Explained

Every few years, Bitcoin’s extraction complexity is increased and the reward for miners is reduced – it goes through halving. This doesn’t only happen to Bitcoin – some altcoins also have emissions limitations, which help avoid inflation and the subsequent death of the cryptocurrency.

In May 2020, the world will witness the next Bitcoin halving, which is expected to make the BTC price soar again. What’s the role of halving in mining, and why this algorithm was introduced?

What is Bitcoin Block Reward Halving?

To understand what Bitcoin halving is, you must first understand the basics of Bitcoin mining. Simply put, new Bitcoins appear in the world as a reward for miners when they mine a Bitcoin block.

When Satoshi Nakamoto established the rules for the Bitcoin protocol (Proof of Work), he made sure to point out two things:

  • Firstly, Bitcoin’s supply is limited to only 21 million.
  • Secondly, the number of Bitcoins generated per block, i.e., reward, is reduced by 50% every 210,000 blocks.
btc supply

During the mining process, a hash (key) is selected at specified intervals (every 10 minutes) to produce a block that contains information about the new transaction, as well as all the previous ones. With each block mined, the complexity of the calculations grows; therefore, to continue mining, the more and more sophisticated equipment is required. The total power of all miners is called a hashrate. Its value is almost continuously growing:

hash rate

Since this process and the work it involves ensures that the blockchain operates as it should, miners receive a certain amount of Bitcoins given for each new block as a reward. This is the way new Bitcoins are issued.

Bitcoin Halving Fundamental Meaning

Since an average of 6 blocks is mined per hour, and halving occurs every 210,000 blocks, the reward is decreased every 4 years (adjusted in one direction or another). The reward for mining will be reduced by 50% compared to what it has been before.

For example, if today every miner receives 12.5 Bitcoins for solving the block, then after the next Halving they will receive only 6.25 Bitcoins.

One of the main drawbacks of traditional fiat currencies controlled by central banks is that banks can print as much money as they want. If they print too much, then the laws of supply and demand ensure that the value of the currency begins to decline rapidly.

Bitcoin, on the other hand, is designed to mimic an asset like gold. Only a limited amount of gold exists in the world, and with each gram of gold obtained, it becomes harder and harder to mine.

The supply of Bitcoins in the market will fall. Now, miners daily extract 1800 BTC with 144 blocks being registered, but after the next halving, that same number of blocks will only bring 900 BTC per day.

The halving mechanism is embedded in the source code and performs several functions:

  • Limits the issue of coins, ensuring it is uniform. The lower the reward for the block, the longer it takes to mine the coins. After halving, the number of Bitcoins mined will decrease. Now, there are 1800 BTC mined daily, but after May 2020, this figure will go down to 900 BTC. Halving slows down the rate at which new Bitcoins are obtained, and in doing so pushes the production date of the last Bitcoin to year 2140.
  • It holds back crypto inflation. The longer it takes for the coins to be mined, the more time it will take for all Bitcoins to go into circulation. Over time, there will be fewer new coins. They will become scarce. The more coins have already been mined, the more difficult it is to get new ones. The slower new coins are mined, the lower is inflation.
  • It contributes to the rise of Bitcoin price (deflation). Since the supply in the market is reduced, the demand, and, subsequently, the prices rise.
  • Keep the miners interested (and busy). Since the block rewards decrease, commission fees increase, and the miners won’t be able to get all the coins at once.

History of BTC Halvings 

Initially, the generation of each new block on the blockchain gave the miners 50 coins, but now, they receive only 12.5 BTC. This is a result of the two halvings that have already happened.

history of halvings

First Halving in 2012

On November 28, 2012, the first Bitcoin halving occurred when the 210,000th block was mined. At the time, one Bitcoin was $13.42, and it seemed that the halving did not significantly affect its price. However, this assumption was (and is) incorrect, as the market back then was completely different.

  • Before the event: the reward was 50 BTC per block
  • After: 25 BTC
  • Price on the day of the event: $12.35
  • Price 5 months later: $127.00
  • Hash rate: 13 TH/s
  • Market cap: 116,037,121

Before the first halving, the price of Bitcoin was $2.55. And a year after the event, it grew to $1037. Curiously, after that it fell by almost 4 times, down to $268.

Second Halving in 2016

The second halving, which happened in July 2016, not only allowed the price to go back to $1037 but to also reach a new, 2.5 times bigger one, with Bitcoin eventually going up to $2525 in July 2017.

  • Before the event, the reward per block was 25 BTC.
  • After: 12.5 BTC
  • Event Day Price: $650.63
  • Price 5 months later: $758.81
  • Hash rate: 5,812 TH/s
  • Market cap: 10,354,974,234

Next Bitcoin Halving 2020

You can follow the time and the number of blocks left until the halving on Bitcoinblockhalf.com. The website shows the countdown to the halving and contains a lot of interesting facts about it. 

halving countdown
The screenshot was taken on October 23, 2019

At the moment, miners continue to receive a reward equal to 12.5 BTC for one block mined. This value has been set after the 2016 Bitcoin halving and will remain unchanged until block 630000, which is expected to be mined from May 21 to May 24, 2020. After that, the reward will decrease to 6.25 BTC.

These dates are calculated with the current mining speed taken into account(~ 10 minutes for mining one block). It is assumed that the generation of 29,2 thousand blocks (the amount left until the halving at the time of writing) should take 203 days.

It can be concluded that prices fluctuate not only due to the factors within the chain. The crypto scene is expanding. There are a number of various events that can crash the market or push the coins to grow. In anticipation of the next halving, the market has already taken actions to strengthen itself and has learned how to interact with regulators.

BTC Price Scenarios After May 2020

In the stock market, a decline in supply with demand remaining at the same level leads to higher prices. This happens to Bitcoin after halving: when the number of new coins being mined is reduced by half, and demand remains the same as it was, a deficit forms over time. Therefore, it is logical that the Bitcoin exchange rate should then begin to move up.

That’s what the leading crypto analyst Tone Vays thinks:

According to Vays, rewards’ halving will help Bitcoin to further consolidate its status as the king of cryptocurrency. Most likely, all attention from competing for high-bandwidth networks such as Bitcoin Cash and Litecoin will go to the leading cryptocurrency. In this case, the main role of Bitcoin will not be a medium of exchange, but rather a repository of value.  

It is likely that Bitcoin will also be used as a truly secure and decentralized intermediary for mutual settlements. According to Tone Vays, alternative projects can never be as excellent a repository of value and, over time, those will completely depreciate in relation to Bitcoin.

There are other opinions on this subject. For example, a Twitter user with the nickname Expsycho thinks that reducing the reward for mining can cause the opposite effect since the crypto community has long been preparing for this event. In his opinion, about 6 months before the event, the price will be inflated and afterwards Bitcoin will rapidly collapse.

Can’t predict the future Tone 🔮, especially Bitcoin. Bitcoin will pump 6 months before halving because people will have FOMO, as litecoin has. Then just after it will dump.

Lewis (@Expsycho) July 5, 2019

A big part of the crypto community, having taken into account the previous history of the Bitcoin exchange rate, expects that the BTC halving of 2020 will bring about the next active bull market period. It will allow Bitcoin to reach new heights. It is, however, likely that the consolidation period has already begun, as there have been a gradual increase and slight rollbacks, just like before the 2012 and 2016 halvings.

It is clear that in the past many other factors influenced the Bitcoin exchange rate besides the halving of rewards itself. However, it wouldn’t be wise to ignore the relationship between the increase in BTC price and an impending halving.

Depending on the situation, the maximum price should be expected to be reached a few months before the halving, as well as 16 months after the miners’ rewards are reduced. As soon as a new maximum is established, the value of the coin may again fall to its price before halving. After reaching a new maximum, Bitcoin is likely to roll back to a bear market, losing up to 80% of its price. Although nothing guarantees that the same cycle will be repeated in 2020, most experts believe that it will.

Halving Impact on Price

As for the behavior of the price of Bitcoin, it usually rises after the halving. However, what if the situation changes before May 2020? 

There are more and more new miners joining, and so the future profitability of mining is being questioned. Therefore, there is a point in trying to attract investors to projects that can improve the mining process – developing new technology and equipment, creating new farms, etc.

Meanwhile, there’s still the question of how the Bitcoin price will behave, and when, and if, it will rise. The key point is the continuous growth of the demand for this cryptocurrency. It needs to be noted, however, that the real volume of Bitcoin sale and purchase, unsurprisingly, is not so easy to track.

It is believed that halving the reward makes mining unprofitable and can make many people quit. However, if you study the previous periods, you can notice that sooner or later after the halving, the following price increase balances the market out, allowing miners to continue making a profit, despite the halved reward.

Final Thoughts

Unregulated sites artificially create almost 95% of all published information about the Bitcoin trade. From this, some analysts conclude that since so many numbers are fake, the cryptocurrency’s total turnover is falsified. This means that, for example, the validity of the Bitcoin dominance index can also be questioned.

However, Bitcoin inspires some optimism, too: in its more than 10-year history, it has not been a victim of hackers.

At the moment it is profitable to create altcoins, as there have been fewer new ones developed lately. This slow down, and the longer it takes for those new coins to establish themselves in the market, may help Bitcoin strengthen its position and possibly overtake gold. Soon, after the appearance of another 210 thousand Bitcoins, the fourth halving will take place. Currently it is predicted to happen in 2024.

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