How it works and why it matters – Forbes Advisor INDIA

The available supply of fiat currencies rises and falls under the watchful eyes of national central banks, but the total supply of Bitcoin is fixed and unchanging.

There will only be 21 million Bitcoin. Currently, more than 19 million Bitcoins have already been mined, leaving less than 2 million to be created. The Bitcoin protocol periodically reduces the number of new coins that miners earn in a process called halving.

“One of the most important features of Bitcoin is its limited supply and issuance mechanism,” said Bruce Fenton, CEO of fintech company Chainstone Labs.

Halving’s role in controlling the supply of new Bitcoins is one of the reasons why the world’s most popular cryptocurrency is seen as a store of value more akin to gold than a fiat currency.

What is Bitcoin Halving?

Bitcoin halving is when the reward for Bitcoin mining is cut in half. Halving occurs every four years.

The halving policy is written into Bitcoin’s mining algorithm to counter inflation by maintaining scarcity. In theory, the reduction in the rate of Bitcoin issuance means that the price will rise if demand remains the same.

At the moment, Bitcoin has an inflation rate of less than 2%, which will decrease with further halvings, says David Weisberger, CEO of trading platform CoinRoutes.

“Bitcoin’s production scarcity is what defines its finitude, and when reward drops, supply is limited,” said Chris Kline, COO of Bitcoin IRA. “Increasing demand at a time when supply is limited has a positive impact on price, which could make Bitcoin attractive to investors.”

How Does Bitcoin Halving Work?

A decentralized network of validators verifies all Bitcoin transactions in a process called mining. They are paid 6.25 BTC when they are the first to use complex mathematics 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 $193,750, a decent incentive for miners to keep adding blocks of Bitcoin transactions that run smoothly.

Those blocks of transactions are added approximately every 10 minutes, and the Bitcoin code dictates that the reward for miners is cut in half after every 210,000 blocks are created. This happens approximately every four years in periods often accompanied by increased Bitcoin price volatility.

When will the next Bitcoin Halve?

The Bitcoin algorithm determines that halving occurs based on a certain creation of blocks. No one knows exactly when the next halving will occur, but experts point to May 2024 as an expected date. It would be almost exactly four years since the last one.

The somewhat predictable nature of Bitcoin halvings is designed to not be a huge 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 following a halving event,” said Rob Chang, CEO of Gryphon Digital Mining, a private Bitcoin miner. “However, the price of Bitcoin usually ends up significantly higher a few months after.”

While there are many other factors affecting Bitcoin’s price, halving events seem to be generally positive for the cryptocurrency after initial volatility has eased.

Richard Baker, CEO of miner and blockchain service provider TAAL Distributed Information Technologies, says investors should be cautious about the next Bitcoin halving. While scarcity can drive price appreciation, reduced mining activity can cause the price to flatten.

“However, the key point for investors to consider is not the specific dates of the halving events, but to focus on the growth of the network in general,” says Weisberger. “As long as the network continues to grow, the likelihood that Bitcoin will fulfill its potential as a global store of value increases.”

When did the first Bitcoin halve?

The first Bitcoin halving took place 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 at 50 BTC per block when Bitcoin was released in 2009. The amount drops in half each time a new halving occurs. For example, 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 only be paid with transaction fees.

Baker points out that miners may shift transaction processing power from BTC once the next halving occurs as they seek more transaction fees elsewhere to make up for lost Bitcoin revenue.

Fewer miners will mean a less secure network, experts say.

On the other hand, while the halving reduces the reward for miners, it also reduces the supply of new coins without reducing 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 rise dramatically in response to the supply shock,” she says. “However, there is still debate as to whether the historical price movement around each halving was a direct product of the halving.”

Higher prices will be an incentive for miners to keep processing Bitcoin transactions.