One of the most pivotal events on Bitcoin’s blockchain is halving. Bitcoin halving has implications for all stakeholders within Bitcoin’s ecosystem. It causes inflation in bitcoin’s price by reducing the number of cryptocurrencies in circulation and increasing demand for bitcoin.
A Bitcoin halving event is when the reward for mining Bitcoin transactions is cut in half. This event also cuts Bitcoin’s inflation rate and the rate at which new bitcoins enter circulation.
To understand what a Bitcoin halving is, we must first learn about how the Bitcoin network works.
Blockchain, the technology that powers Bitcoin, is essentially a group of computers (or nodes) that run Bitcoin’s software and store a partial or complete history of transactions on its network. The decision to accept or reject a transaction in the Bitcoin network rests with each full node or a node that contains the entire history of transactions on Bitcoin. To achieve that, the node performs several validations to make sure the transaction is legitimate. These include making that the transaction is within the specified length and has the appropriate validation parameters, such as nonces.
Each transaction is given a separate approval. Following approval, the transaction is broadcast to other nodes and added to the current blockchain.
The stability and security of the blockchain are increased by adding more computers, or “nodes.” The expected number of nodes executing the Bitcoin code is 14,616. 1 As long as they have adequate storage to download the whole blockchain and its transaction history, anyone can join the Bitcoin network as a node, but not all of them are miners.
The word “mine” is not used literally; instead, it refers to the process of gathering precious metals. The technique by which individuals use their computers to take part in the blockchain network of Bitcoin as a transaction processor and validator is known as bitcoin mining. Bitcoin miners solve mathematical puzzles and validate transactions’ validity. Proof of work (PoW) is the system utilized by Bitcoin.
This implies that miners must demonstrate that they have worked hard to process transactions to get compensated. The time and energy required to run computer hardware and solve challenging equations are included. The miners that process and verify transactions are rewarded with bitcoins when the block is full of transactions. More confirmations are needed for transactions with higher dollar amounts to maintain security.
After every 210,000 blocks mined, or roughly every four years, the block reward provided to Bitcoin miners for processing transactions is slashed in half. The rate at which new bitcoins are issued into circulation is cut in half during this event, which is why it is known as a “halving.” This is how Bitcoin enforces artificial price inflation until every bitcoin is released.
When the intended limit of 21 million is achieved, this awards system will end around 2140. At that point, network users will pay fees to miners in exchange for processing transactions to reward them. These fees make sure that miners continue to have a reason to mine and maintain the network.
The halving event is significant because it represents yet another decrease in the pace at which new Bitcoins are created as the overall maximum number of bitcoins, which is 21 million, approaches its finite supply. Only over 2.15 million bitcoins remain released through mining incentives as of October 2021, with approximately 18.85 million already in use.
Each block in the chain mined in 2009 earned a reward of 50 bitcoins. After the initial halving, there were 25, then 12, then, as of May 11, 2020, there were 6.25 bitcoins every block.
Why does the Bitcoin price halving matter?
The halving is one of the ways the Bitcoin protocol maintains scarcity, which is one of the factors in the millions of people’s desire for Bitcoin. The halving increases the likelihood that Bitcoin’s value will increase by gradually issuing fewer bitcoin over time (assuming consistent levels of demand). Contrast this with fiat currencies, which often experience inflation-driven value erosion over time, which is why you could buy a bottle of Coke for a dime in the 1960s.
(written by Catherine S Thomas)