Bitcoin mining refers to the process of validating and auditing transactions on the Bitcoin blockchain. Miners ensure that all transactions are valid, before adding them to a block. They also prevent users from double spending Bitcoin. To validate transactions, miners must compete to solve complex mathematical problems using supercomputers and other mining hardware with high processing power. When they do so successfully, new Bitcoin are formed.
This procedure simultaneously describes how all Bitcoin came into circulation since Satoshi Nakamoto mined the genesis block in 2009. Miners are solely responsible for the introduction of new Bitcoin and also provide added security and transparency by contributing computational power. For these efforts, they are rewarded a chunk of the newly formed Bitcoin. The amount of Bitcoin rewards miners would receive was predetermined to follow a regular pattern by Nakamoto.
After the genesis block was mined, mining one block attracted a reward of 50 BTC. Four years later in 2012, the same efforts would only yield 25 BTC. In 2016, mining rewards further depleted by half to 12.5 BTC and in 2020, 6.25 BTC. Simply put, mining rewards are slashed by half after every 210,000 mined blocks, which occurs in about four years. This sequential pattern is referred to as Bitcoin halving.
What is a Bitcoin Halving/Halvening?
Bitcoin halving is a very significant facet of the digital asset, especially considering its finite supply. Of the 21 million Bitcoin maximum supply, about 18 million Bitcoin have been mined, leaving just about 2.162 million.
Halving makes it possible for miners to continue receiving incentives even as the circulating supply nears maximum supply. For further context, if block rewards remained constant at 50 BTC for each mined block, maximum supply will be mined at a much faster rate – the circulating supply will quickly equal maximum supply. This means that miners will no longer receive mining rewards from new Bitcoin since none will be formed in the process.
If Bitcoin is mined at the same initial rate, then it would ultimately fail to achieve one of the main objectives of its existence – to provide a viable alternative to inflation-riddled fiat currencies. Halving makes Bitcoin resistant to inflation due to the dwindling rewards. Halved miners’ rewards result in considerably lower supply and higher demand which leads to increased price and reduced inflation.
Previous Bitcoin Halving/Halvening Events
A study of the previous halving events proves that halving is associated with an upward price movement and lower inflation. The first Bitcoin halving which took place in November 2012 saw Bitcoin price rise by $1100 within a year. Inflation also declined by more than 50% from 2009 when the first block was mined. In December 2017, Bitcoin price rallied to a then all-time high of $20k+ after the second halving occurred in July 2016. Inflation also lowered to 3.93%.
The most recent halving took place in 2020, and the next is poised to occur in 2024. Following this, mining rewards will be halved from 6.25 BTC to 3.125 BTC. This sequence will repeat until the last Bitcoin will be mined in 2140. When this takes place, miner’s incentives will be solely from transaction fees.