What is bitcoin halving and how does it affect the cryptocurrency rate?

Halving, or halvening, is when the reward for cryptocurrency miners is divided by two. When does bitcoin halving take place? It occurs every 210,000 blocks, so about every 4 years. Keep reading to find out what is bitcoin halving and what are its consequences.
bitcoin halving

The last bitcoin halving date was 11th May 2020. The reward for the miners who dug up a block decreased from 12,5 to 6,25 BTC. The bitcoin split is one of the economic foundations of digital coins. Reducing the mining reward decreases the speed of creating new cryptocurrency units. This enables a pre-planned control of the inflation rate, which distinguishes most cryptocurrencies from fiat currencies without a limited supply.

The Proof of Work consensus algorithm vs. BTC halving

One of the foundations of bitcoin’s blockchain is the Proof of Work consensus algorithm. To put it simply, a distributed transaction database operates within a multi-node network. Each node includes an incomplete or full transaction history in the form of data blocks. When a new transaction appears in the network, all the nodes must agree as to its validity before it enters the block and is executed. They confirm this by doing some work in the form of cryptographic calculations. This is rewarded with new BTC coins. Bitcoin halving reduces this reward by half.

BTC halving is forced by the protocol regulations

Reducing the mining reward is the basic function of the bitcoin protocol which is located in its source code (Bitcoin Core). The code is available for viewing on Github. There you can read about the necessity of bitcoin halvening and the expected bitcoin halving dates (every 210,000 blocks).

BTC halving is extremely important because it causes a cyclical reduction in bitcoin supply. What’s more, the supply reduction happens more gradually each time. For example, if the mining reward were to be decreased by a fixed amount, the BTC supply would end much faster than with the use of halvening.

Bitcoin is a deflationary cryptocurrency because the supply of its coins is limited to 21 million. Since the last bitcoin split in May 2020, there are about 18 742 575 BTC (coinmarketcap.com). There are still about 2 257 425 bitcoins to be dug up, which means that new coins will continue to appear until roughly 2140. That is when the last bitcoin halving date is expected to be.

Bitcoin halving dates and reward reductions

After the final bitcoin halving in 2140, the BTC miners will continue to receive rewards for validating user transactions. This will hopefully keep the miners’ incentive to continue their maintenance work for the network.

When is bitcoin halving going to take place? Here we have listed the BTC halving dates up to the year 2028 and the rewards for digging up BTC blocks:

  • 28th November 2012, 210,000 blocks, reward of 25 BTC;
  •  9th July 2016, 420,000 blocks, reward of 12.5 BTC;
  • 11th May 2020, 630,000 blocks, reward of 6.25 BTC;
  • 2024, 840,000 blocks, reward of 3.125 BTC;
  • 2028, 1,050,000 blocks, reward of 1.5625 BTC.

Bitcoin split consequences

New coins are being created more slowly, so the supply is decreasing, which in turn has some consequences for investors. Low supply assets, such as gold, usually generate a large demand and high prices.

In 2009, the mining reward in the BTC network was 50 bitcoins for every block. After the first halvening the reward decreased to 25 BTC, then to 12.5 and is now 6.25 after the BTC halving of 2020. You can compare this to decreasing the amount of mined gold every 4 years which would probably increase its price.

In the past, bitcoin halving was directly linked to large rises of the BTC rates. After the first halving of 28th November 2012, the bitcoin rate went up from 12 USD to 1207 USD for 1 BTC. After the second BTC halving of 9th July 2016, the coin was worth 19,345 USD in 2017. After that, there was a slow drop, until it reached 3200 USD on 15th June 2018.

On the date of the last bitcoin halving on 11 May 2020, the coin value was about 8821 USD. Barely a year later, on 12th April 2021, the BTC rate was over 63,550 USD. This means an increase of approximately 650% compared to its valuation on the bitcoin halving date. Even though the valuation decreased to about 49,500 USD after a month, it was still 460% more than the price on the halving date.

The impact that bitcoin halving has on the value of the stock exchange rate and the motivation for miners can be presented in several points:

  1. The reward value drops by half.
  2. Inflation drops by half.
  3. The coin supply drops by half.
  4. The demand is twice as large.
  5. Lower supply and higher demand raise the price, which encourages miners to work, despite the smaller nominal reward.

The two bitcoin halvings caused an increase in the currency’s value, but there have been drops since. Even so, the rate was still much higher than before the bitcoin split. For example, during the 2017-2018 bubble, the BTC exchange rate increased to around US $ 20,000, then dropped to roughly $ 3,200, but before the halvening it was about $ 650 for 1 BTC.

What if BTC halving wouldn’t affect the coin’s value?

If bitcoin halving would not increase the demand and value of the coin, there would be no economic incentive for the miners. The reward reduced by half would decrease the cost-effectiveness of validating block transactions, which in turn could lead to many miners withdrawing from participating in network maintenance.

To avoid this situation, the BTC protocol includes the possibility of decreasing the difficulty level of digging up new coins. This ensures that in the event of a bitcoin halving reducing the reward and a lack of increased demand, miners will be able to dig up new cryptocurrency coins faster. This would keep their earnings at a level that encourages them to continue their work.

As you can see, bitcoin halving has a large effect on the currency rate, so you should keep it in mind when looking to invest. At the same time, remember that rises in bitcoin prices also often correlate with celebrity hype, institutional interest in cryptocurrencies and regulatory speculations.

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