The amount of bitcoin awarded to miners is halved every four years until all 21 million bitcoin have effectively been mined (probably around the year 2140). Bitcoin is a limited, inflation-resistant resource thanks partly to the halving mechanism.
While national central banks keep an eye on the availability of conventional currencies, the total supply of Bitcoin is fixed and unchangeable.
Twenty-one million Bitcoin will ever exist. There are currently slightly less than 2 million left to be created after a little more than 19 million have been mined. With each new block, the Bitcoin protocol automatically halves the number of new coins that are created.
Limiting the supply of Bitcoin is entirely at odds with how fiat currencies like the U.S. dollar operate. Fiat money was initially produced under strict regulations: for every dollar issued, the U.S. government had to hold a specific quantity of gold in reserve. The gold standard was referred to as this.
Satoshi Nakamoto, who invented Bitcoin, thought that the devaluation of fiat money could have disastrous consequences. As a result, he used code to prevent any one party from being able to produce more Bitcoin.
The proposed limit of 21 million coins will be reached sometime around 2140, after which this rewards system will end. 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 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 typically experience inflation-driven value erosion over time, which is why you could buy a Coke for a dime in the 1960s. 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.
How Does it Work?
A decentralized network of validators verifies all Bitcoin transactions through a process known as mining. When they are the first to use complex math to add a collection of transactions to the Bitcoin blockchain as part of its proof of work mechanism, they are rewarded with 6.25 BTC.
These blocks of transactions are added roughly every 10 minutes, and the Bitcoin code mandates that after 210,000 blocks are generated, the reward for miners is cut in half. That occurs approximately every four years, usually during times of increased volatility in the price of bitcoin.
Even as demand rises, halvings slow down the production of new coins, reducing the amount of available new supply. This has some financial ramifications for investors because other assets with limited or low supply, like gold, may experience high demand and consequently increase in price.
Why does it Happen Less Frequently Than Every Four Years for the Halvings?
The Bitcoin mining algorithm aims to discover new blocks once every 10 minutes. However, the time it takes to find blocks will get shorter as more miners join the network and boost its hashing power. This is fixed by restoring a 10-minute target by resetting the mining difficulty, or how challenging it is for a computer to solve the mining algorithm, roughly every two weeks. The average time to find a block has consistently stayed under 10 minutes despite the exponential growth of the Bitcoin network over the past ten years (roughly 9.5 minutes)
What happens to the price of Bitcoin when it is halved?
Data from the past reveals a connection between price increases for bitcoin and its halving. Of course, many factors, not just price reductions, affect the price. The price of Bitcoin was approximately $11 at the time of the first halving, which took place in November 2012. It multiplied one hundredfold in a year.
Bitcoin halving reduces the rate at which new bitcoins are put into circulation by half and imposes artificial price inflation on the cryptocurrency network. The proposed 21 million limits for bitcoin is anticipated to be reached in the year 2140, at which point the rewards system is anticipated to end. After that, fees will be paid to miners for handling transactions.