Like the Olympics, the bitcoin network initiates a special event called “halving” every four years, and it is intensively followed by millions of bitcoin investors. And halvings are such a huge deal for a reason.
Namely, the bitcoin price soared by hundreds of percent a few months after each of its halving days. Naturally, it’s vital for every bitcoin investor to understand halvings and their impact on the value of bitcoin.
First, A Little Background On “Mining”
Every transaction that occurs using bitcoins gets stored on a ledger called the “blockchain.” This blockchain (or a ledger) is similar to a decentralized bank ledger that keeps track of balances and transactions.
Now, in order to make sure that the blockchain stays up to date and accurate, the bitcoin network “hires” miners to verify these transactions. How? The answer is easy. Miners use computer equipment to solve complex equations in a process called mining.
In this process, miners are basically playing the role of virtual bank tellers: verifying checks, making sure all the signatures and account numbers are proper, matching the customer name with an official ID, and double-checking that the user has enough cash to fund the transaction. But instead of checks, miners check the codes within the blockchain network.
When these equations are solved, miners have verified transactions on the blockchain and the transactions are cleared to go through. For all these troubles, bitcoin will pay the miners by releasing 6.25 bitcoin from its reserves of untapped supply.
The Unusual Characteristic Of Halving
Now, here’s an unusual characteristic about bitcoin. Bitcoin halvings are scheduled to occur once every 210,000 blocks – roughly every four years – until the maximum supply of 21 million bitcoins has been released by the bitcoin network. On the day of halvings, the number of bitcoins rewards given to bitcoin miners for processing transactions is cut by 50%.
Case in point: For four years from 2016 to 2020, 12.50 bitcoins were released per one block for every 10 minutes. After the recent “halving” in 2020, only 6.25 bitcoins are now released per one block.
As a result, these halvings will immediately lower the production rate of bitcoin. Why? Once again, bitcoin released 12.50 bitcoins every 10 minutes for four years. Then all of a sudden, only 6.25 bitcoins get released every 10 minutes after the “halving day.” And can you guess what might happen to bitcoin’s price? Well, let’s imagine if the world’s annual gold production is suddenly cut in half, how would it impact the price of gold? Surely, the price is likely to skyrocket because the supply just got more scarce.
Obviously, that’s Economics 101 of supply and demand.
Naturally, these Bitcoin halvings have correlated with massive surges in Bitcoin’s price:
- The first halving, which occurred in November of 2012, sent bitcoin from about $12 to nearly $1,150 within a year.
- The second halving occurred in July of 2016. The price at that halving was about $650 and bitcoin’s price surged to nearly $20,000 in the next 17 months.
- The third and most recent halving occurred in May of 2020. It quickly became a catalyst of the recent surge to just under $50,000 — as illustrated by the chart below from Portfolio Insider:
Why Does Halving Happen?
By now, you are probably wondering, “Why does halving occur every four years?”
Edan Yago, the co-founder of the Bitcoin-based finance protocol Sovryn, explained: “Satoshi Nakamoto (the pseudonymous creator of Bitcoin) anticipated that as the transaction fees generated by the network increased over time, the need for the miner subsidy would decrease – and built the pre-determined, diminishing rate of newly minted BTC with this in mind.”
In other words, after bitcoin has released all of its 21 million supply, the miners will start earning a bulk of its revenue from transaction fees paid by the users. This is similar to Mastercard earning 2.5% for every transaction made on its card.
Around the year 2140, the last of the 21 million bitcoins is scheduled to be released. At this point, the halving schedule will stop since the supply of new bitcoins will be fully exhausted. However, this is more than 100 years from now. Until then, virtually any bitcoin investor must pay close attention to halvings because of their enormous impact on the price of bitcoin.
The next halving is expected to happen in 2024.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.