The Bitcoin Halving
What the Bitcoin Halving Is and Why It Matters
The Bitcoin Halving
Bitcoin is digital money.
Like all forms of money, bitcoin has monetary policies.
One of bitcoin’s essential monetary policies is its fixed total supply limit of 21 million bitcoin. There will only ever be 21 million bitcoin in existence.
One of bitcoin’s other key monetary policies is directly related to its supply limit and has to do with how that supply is disbursed.
The bitcoin halving is a mechanism by which the amount of bitcoin released into circulation is cut in half every four years.
Bitcoin is money.
It has monetary policies.
The bitcoin halving is one of those.
Bitcoin miners “create” bitcoin.
Bitcoin miners run specialized computer hardware and software to view all of the transactions on the bitcoin network.
Then, they process those transactions and add them to the blockchain, a public ledger that records all activity on the bitcoin network. Miners are competing with one another to do this first.
When bitcoin miners successfully process a block of transactions, they win a reward for doing so. That reward is a set amount of bitcoin and is also what gets cut in half roughly every four years when the bitcoin halving occurs.
Miners can keep their bitcoin reward (called the block reward) or sell it to the open market in order to pay mining costs, turn a profit, or for any other reason.
Bitcoin miners are part of a system of checks and balances along with bitcoin nodes who also run the bitcoin software, validate transactions, and broadcast them to other computers on the network.
History of block rewards:
The block reward that bitcoin miners received for processing and adding transactions to the blockchain started at 50 bitcoin per block.
Then, halvings came into play:
1st Halving: 25 bitcoin
2nd Halving: 12.5 bitcoin
3rd Halving: 6.25 bitcoin
Upcoming Halving: 3.125 bitcoin
Bitcoin miners process transactions.
They earn bitcoin for doing so.
That reward gets halved every 4 years.
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What does any of this mean?
There will be 21 million bitcoin. Fewer and fewer bitcoin get released the closer we get to that 21 million cap. Bitcoin miners help make that happen. K… so what?
Bitcoin’s monetary policies, including the halving, are important because they further emphasize certain value propositions. Most importantly:
The bitcoin halving and the path to 21 million bitcoin in circulation is an exercise in scarcity. The closer to that finite number, the more scarce bitcoin is and the more a supply versus demand incentive cycle kicks in. Halvings are like a checkpoint in bitcoin’s roadmap toward 21 million.
The process by which the path to 21 million occurs (i.e. bitcoin mining) is an exercise in decentralization. Bitcoin miners can be anyone, anywhere so long as they run the bitcoin software and have the necessary equipment to compete against other miners.
There is no central bank or centralized authority in bitcoin that releases bitcoin into the market. Bitcoin mining is just one way in which bitcoin is decentralized.
The bitcoin halving emphasizes:
scarcity and decentralization
Bitcoin markets react to the halving.
One might think that a built-in supply versus demand component leads to a natural rise in the price of bitcoin. On a long enough timeline, this has been true. But, it’s important to note that there’s not a perfect pattern and that past performance isn’t necessarily an indicator of future performance.
Supply and demand says that the closer we get to 21 million, the fewer bitcoin there are left unclaimed, and the more valuable those and all bitcoin will be.
Bitcoin price highs after halvings:
$1,150—high after 1st halving
$19,900—high after 2nd halving
$69,000—high after 3rd halving
Historically, bitcoin has risen in price after halvings. That said though, the timeline and magnitude of that price action depends on various factors.
Some key factors:
old vs. new bitcoiners
Two of many key factors to consider include the broader macro economic environment’s impact on bitcoin markets and the crypto industry at large and the amount of bitcoin trading by different types of bitcoiners.
New bitcoiners tend to not fully understand the significance of the halving until they’ve seen it in more than one market cycle. Thus, they tend to underemphasize the amount of impact the halving will have on bitcoin’s price.
Older bitcoiners tend to think several things, all of which can be either right or wrong but the point is they’re often trying to predict how new bitcoiners and traders will act before and after the halving.
Common questions around the halving:
is it already baked into the price?
will there be a delayed upswing?
There’s no crystal ball for how markets will react around the halving. For example, the 3rd halving occurred on May 11, 2020 during the initial aftermath of the global pandemic. Macro markets and crypto markets experienced extreme volatility during the weeks between the start of the pandemic and the halving.
If there’s one takeaway from this and all other prior halvings, it’s simply that, on a long enough timeline, bitcoin’s price has appreciated between halvings.
price at 1st halving: $12.35
price at 2nd halving: $650.63
price at 3rd halving: $8821.42
Markets are unpredictable.
But, over time, bitcoin has appreciated.
The bitcoin halving plays a pivotal role in bitcoin. It emphasizes bitcoin’s monetary policies related to scarcity and decentralization. The halving occurs every four years (technically every 210,000 transaction blocks) and results in the reward that bitcoin miners receive for their efforts being cut in half.
There have been three bitcoin halvings thus far and the next halving should occur in 2024. You can use a countdown clock to estimate when it will be.
Markets are unpredictable around the halving (or… anytime for that matter). Some factors to consider regarding markets include the trading activity of newcomers to the bitcoin and crypto space, how much both they and veteran bitcoiners have considered the halving’s impact on markets, and broader macro conditions.
Want to keep learning?
Considering how you hold and secure bitcoin is critical before, during, and after any halving. In fact, it’s important all the time! I sleep better at night knowing my bitcoin is secure and cannot be lost, frozen, or otherwise impacted by external events.
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