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Published: Sep 22, 2023, 11:38am
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The available supply of conventional currencies rises and falls under the watchful eyes of national central banks, but the total supply of Bitcoin is fixed and immutable.
There will only ever be 21 million Bitcoin. Presently a bit more than 19 million have been mined, leaving just under 2 million left to be created. The Bitcoin protocol automatically reduces the number of new coins issued with each new block in a process called halving.
“One of the most important features of Bitcoin is its limited supply and issuance mechanism,” says Bruce Fenton, CEO of fintech company Chainstone Labs.
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The Bitcoin halving is when the reward for Bitcoin mining is cut in half. Halving takes place every four years.
The halving policy was written into Bitcoin’s mining algorithm to counteract inflation by maintaining scarcity. In theory, the reduction in the pace of Bitcoin issuance means that the price will increase if demand remains the same.
“Bitcoin’s production scarcity is what defines its finiteness, and when reward goes down, supply is constrained,” says Chris Kline, chief operating officer of Bitcoin IRA. “Increasing demand at a time when supply is constrained has a positive impact on price, which can make bitcoin alluring to investors.”
A decentralised network of validators verify all Bitcoin transactions in a process called mining. They are paid 6.25 BTC when they are the first to use complex math to add a group of transactions to the Bitcoin blockchain as part of its proof-of-work mechanism.
At the current Bitcoin price, 6.25 BTC is worth about £87,000, a decent incentive for miners to keep adding blocks of Bitcoin transactions running smoothly.
Those blocks of transactions are added roughly every 10 minutes, and the Bitcoin code dictates that the reward for miners is reduced by half after every 210,000 blocks are created. That happens roughly every four years in periods that are often accompanied by heightened Bitcoin price volatility.
The first Bitcoin halving occurred in November 2012. The next halving was in July 2016, and the most recent halving was in May 2020.
The reward, or subsidy, for mining, started out at 50 BTC per block when Bitcoin was released in 2009. The amount drops in half each time a new halving takes place. For instance, after the first halving, the reward for Bitcoin mining dropped to 25 BTC per block.
The last halving will occur in 2140. At that point, there will be 21 million BTC in circulation and no more coins will be created. From there, miners will just be paid with transaction fees.
Richard Baker, CEO of miner and blockchain services provider TAAL Distributed Information Technologies, points out that miners may shift transaction processing power away from BTC once the next halving takes place as they seek more transaction fees elsewhere to make up for lost Bitcoin revenue.
Fewer miners would mean a less secure network, experts say.
On the other hand, while the halving reduces the reward for miners, it equally lowers the supply of new coins without reducing the demand, notes Patricia Trompeter, CEO of cryptocurrency miner Sphere 3D Corp.
“If the economic theory holds true, which historically for Bitcoin it has, Bitcoin prices should increase dramatically in response to the supply shock,” she says. “Although, there is still debate on whether the historical price movement around each halving was a direct product of the halving.”
Higher prices would be an incentive for miners to keep processing Bitcoin transactions.
The number of new Bitcoins issued as a reward for miners who add a new block of validated transactions to the Bitcoin’s blockchain has halved every four years since 2009.
The initial reward was 50 BTC, which would be worth more than £1,000,000 today. Presently, the reward is 6.25BTC, equal to roughly £136,000.
Here’s how the reward has lessened every four years since Bitcoin began:
The Bitcoin algorithm dictates halving happens based on a certain creation of blocks. Nobody knows exactly when the next halving will occur, but experts point to April/ May 2024 as an anticipated date. That would be almost exactly four years since the last one.
The somewhat predictable nature of Bitcoin halvings was designed so that it’s not a major shock to the network, experts say.
But that doesn’t mean there won’t be a trading frenzy surrounding Bitcoin’s next halving.
“Historically, there is a lot of Bitcoin price volatility leading up to and after a halving event,” says Rob Chang, CEO of Gryphon Digital Mining, a privately held Bitcoin miner. “However, the price of Bitcoin typically ends up significantly higher a few months after.
While there are many other factors influencing Bitcoin’s price, it does seem that halving events are generally bullish for the cryptocurrency after initial volatility eases.
Baker says investors should be cautious about the next Bitcoin halving. Although scarcity can drive price appreciation, reduced mining activity could cause the price to level off.
“The key point for investors to consider, however, isn’t the specific dates of halving events but to focus on the growth of the network overall,” Weisberger says. “As long as the network continues to grow, the likelihood of Bitcoin fulfilling its potential as a global store of value increases.”
Each time Bitcoin goes through a halving, the rate of supply effectively halves too. When demand levels for an asset remain constant but supply is reduced, the asset tends to appreciate in value.
Traders may seek to exploit this dynamic by investing in Bitcoin ahead of next April’s anticipated halving, in hopes it will increase the value of their holdings.
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When the first halving happened in 2012, there was a negligible effect on Bitcoin’s value, but this was in the cryptocurrency’s early days, before rampant speculation began.
In the year ahead of the second halving in 2016, however, Bitcoin went from around £170 to just over £500 (up 194%).
In the 12 months leading up to the May 2020 halving, Bitcoin rose from around £4,000 to roughly £8,000, marking a 100% increase in value.
We’re now within 12 months of the next halving. In April 2023 Bitcoin was valued at approximately £23,000. Since then, BTC has gone up and down and currently sits at around £21,000.
While previous pre-halving periods have seen tremendous growth, early indications show this one may be different. Regardless, past performance is no indication of future results.
Bitcoin was designed to halve every four years in order to maintain scarcity as a counterbalance to inflation. The idea is that reducing supply against a backdrop of sustained demand would drive BTC prices up, protecting against the way inflation devalues assets.
Once the last of the total 21 million Bitcoins have been mined, miners who successfully add blocks of validated transactions to the blockchain will be rewarded with transaction fees, rather than newly minted BTC. It’s predicted the 21 million limit will be effectively reached by 2140.
After the next halving in April 2024, the mining reward will fall from 6.5 BTC to 3.125 BTC.
Matt Whittaker specializes in natural resources journalism. Over the past two decades, he’s reported on energy, cannabis, mining, agriculture and commercial fishing from the Americas, Europe and Asia. The Wall Street Journal, Barron’s, U.S. News & World Report, New Scientist, VICE and other publications have featured his work. You can follow him on Twitter and connect with him on LinkedIn.
Staff writer Mark Hooson has been a journalist within the personal finance, consumer affairs and fraud sectors for more than 10 years. He is also Forbes Advisor UK’s resident tech expert. Mark says he thrives on making ‘complicated and dry topics easier to digest’.
Thank you for joining us on this exploration of blockchain news.
Until next time, stay curious and keep exploring.
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