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What Is Bitcoin Halving?

May 10, 2022
6
min

Halving is a process designed to control the supply of Bitcoins. It slows the production rate of new Bitcoins and bolsters the cryptocurrency’s value.

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When Satoshi Nakamoto (the pseudonym for a person or group) designed Bitcoin in the late 2000s, the cryptocurrency was imbued with an important property: scarcity. By design, there would never be more than 21 million Bitcoins. It was a hard cap.

Since Bitcoin was launched in 2009, about 19 million of the tokens have gone into circulation. Even so, the remaining 2 million aren’t expected to be minted until the year 2140. The reason it will take so long was baked into Bitcoin’s coding at the beginning.

The trick to ensuring Bitcoin’s longevity and value was to regulate and slow the creation of new coins to a trickle as the 21 million ceiling approached. The mechanism for doing this was something called Bitcoin halving.

What is Bitcoin halving?

Halving is a process designed to control the supply of Bitcoins. It slows the production rate of new Bitcoins and bolsters the cryptocurrency’s value. As the name suggests, halving cuts the production of new Bitcoins by 50%.

The key to halving is managing incentives for the creation of new tokens. Bitcoin miners are at the heart of this crucial feature in the cryptocurrency’s system. They spend enormous sums to amass and maintain computing power, and use it to process transactions and create new tokens. Miners help build blocks of data and record them in a transparent chain comprising every Bitcoin transaction in history. New blocks are added about every 10 minutes. 

As a reward for their efforts, Bitcoin’s underlying software rewards miners with new tokens. The number of tokens they receive is cut in half at key moments in the evolution of the blockchain. The idea is that halving will slow the rate of increase in the supply of tokens and bolster their value. That, in turn, will motivate miners to continue their work until the 21 million threshold is eventually reached.

How does Bitcoin halving work?

Bitcoin’s source code automatically triggers a halving when the required number of blocks have been added to the chain. Back in 2009, miners received 50 Bitcoins for every block they produced. There have been a series of halvings, the first of which happened in 2012. After the last halving on May 11, 2020, miners get 6.25 Bitcoins for every block. In 2024, the reward rate will decline, or halve, to 3.125 Bitcoins and in 12 years the reward will fall below 1 Bitcoin, to 0.78.

When the last new Bitcoin is minted more than a century from now, the program will automatically stop the halving process. 

What happened the last time Bitcoin was halved?

Halving is designed to take advantage of the economic law of supply and demand. When the supply of a product or commodity is cut, and demand stays at least constant, the price invariably rises as buyers scramble to purchase the goods. Just look at the price of gasoline when there’s a squeeze in the oil supply due to a geopolitical crisis.

The same forces are at work in the Bitcoin market. When halving cuts the rate of increase in the supply of new tokens while demand rises, the token’s value soars. In the runup to the halving in May 2020, for instance, Bitcoin was trading between $8,000 and $9,000. By the end of the year it was worth almost $30,000.

The halving dovetailed with a surge in demand for cryptocurrencies after the Covid-19 pandemic spurred governments in North America and Europe to address the economic crisis by distributing an unprecedented level of stimulus payments to households and companies. Many recipients of this largesse invested in Bitcoin, especially younger investors drawn to the novelty of crypto. Past halvings also preceded surges in Bitcoin’s price.

Why is Bitcoin halving important?

The U.S. dollar is supervised by the Federal Reserve. Other central banks around the world do the same with their respective sovereign currencies. Bitcoin was conceived to be a global currency that doesn’t need supervision. It’s decentralized.

Still, halving demonstrates there is a modicum of control in Bitcoin, even if it was programmed into its code long ago. Halving is a form of currency management. In other words, it’s a rare instance of Bitcoin’s creator(s) exercising management of the money supply, which isn’t all that different from a central bank adjusting how many dollars, euros, or yen are in circulation.

With halving, Bitcoin’s architects have come up with a way to lengthen the time it will take to hit the supply ceiling. That’s important because in adding supply, even in diminishing amounts, it deepens and broadens the market. It’s similar to when a publicly traded company sells additional shares—the move raises capital and makes the stock more accessible to investors. Likewise, when central banks increase or cut the money supply, it changes the dynamics of the currency and the economy where it circulates.

The catch is that if miners receive fewer Bitcoins for their labors, they may not want to continue their operations. Mining would no longer be worth the expense. So it’s crucial that the value of Bitcoin rises after halving to keep miners motivated. They have to continue to want to mine Bitcoin and collect rewards that are smaller in number but worth much more. This balance between supply and demand is critical in making sure new Bitcoin will be steadily minted in a controlled manner.

What decides when the next halving is?

The halving process was programmed into the Bitcoin system and occurs automatically when 210,000 blocks of data have been added to the distributed ledger known as the blockchain, which is a network of thousands of computers around the world. That happens about every four years. Some cryptocurrency data providers maintain a Bitcoin halving clock.

Unlike Ethereum and other blockchain-based networks, Bitcoin’s programming is difficult to modify or change. The blockchain itself is immutable, meaning it can’t be altered unless someone mounted what is known as a 51% attack and took over a majority of the computers managing the system—which might be theoretically possible, but not practically feasible.

Today there is little chance an entity could marshall enough computers to mount a 51% attack. As fewer new Bitcoins are produced with every halving, the number of miners processing data for the blockchain and making new tokens may fall to a level where such a hack is possible. If that happens, Bitcoin’s security may become vulnerable, which could trigger a decline in value.

The bottom line 

Halving is an innovation that goes right to the heart of the Bitcoin proposition. As a piece of software coding it’s a way to manage the supply of newly minted Bitcoin so it doesn’t overwhelm demand and devalue the token. At the same time, halving makes sure miners will remain motivated to continue going to the trouble and expense of processing Bitcoin transactions, creating new tokens, and building the blockchain’s decentralized ledger. 

It may be ironic that Bitcoin halving mimics the behavior of the traditional central banks the decentralized cryptocurrency is supposed to replace. By managing its money supply, albeit with software instead of central bank policy makers, Bitcoin is supposed to ensure that the laws of supply and demand will support its sustainability and not work against it.

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