To ensure that bitcoin would be a good store of value by remaining a deflationary currency, Satoshi Nakamoto—the name used by the person/people who created Bitcoin—programmed bitcoin halving into the bitcoin protocol.
“Bitcoin halving” refers to an event that happens every four years when the block rewards for bitcoin miners get cut in half. This reduces the supply of new bitcoins by 50%.
Bitcoin Mining Basics
To understand the answer to “what is bitcoin halving”, it helps to have a basic understanding of mining—the process by which new bitcoins are created.
The bitcoin network functions in a way that requires no centralized planning or authority. People can send value to each other peer-to-peer, for a small cost. But with this design, who is going to facilitate the transactions, and why would they want to do so?
That’s where the miners come in. Bitcoin “miners” are computers that process transactions for the network. They verify that transactions are valid and keep the network secure. In exchange, miners receive new bitcoins as they are created.
Bitcoin transactions form groups known as “blocks.” Each block gets attached to all the previous blocks, forming what’s known as a “blockchain.” A new block gets created once every ten minutes or so. Miners compete to “find” the next block and earn its rewards, with the miners who put in the most work having the highest odds of winning the lottery-like distribution of new coins.
As of 2020, the reward for finding the next block is 6.25 bitcoins. While bitcoin miners do receive a small fee for processing transactions, block rewards are much greater and are the main reason people participate in the mining process.
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When Does Bitcoin Halving Occur?
Bitcoin halving happens once every year fours or so. The first halving happened in 2012, when the block reward was reduced to 25 BTC per block from the original 50 BTC per block.
Bitcoin was created in response to the banking crisis of 2008. In the genesis block—the first block ever created in the bitcoin blockchain—a message was encoded that read “Chancellor on Brink of Second Bailout for Banks.”
This was a reference to a headline from The London Times in 2008 regarding the bailouts of financial institutions that had been deemed “too big to fail.”
Satoshi Nakamoto seems to have been trying to develop a system of money that could work better than the one created by central banks. One of the most important things programmed into the protocol that would try to achieve this end was the bitcoin halving.
By constantly reducing the supply of new currency, bitcoin would forever remain a deflationary currency, rather than an inflationary one. Some people (including, one might guess, Satoshi) believe that central bank intervention in the monetary system contributes to many of the financial problems plaguing modern society, like wealth inequality and regular financial crises.
These people see fiat currency—money not backed by gold or another commodity—, and the ability of central banks to create endless amounts of it out of thin air, as the core of the problem.
According to this school of thought, a deflationary and decentralized currency like bitcoin could serve as an antidote to the present monetary system. But in order to retain its value, a new currency must have a limited supply and be difficult to create.
Is Bitcoin Halving a Good or Bad Thing?
Bitcoin halving is widely considered to be a good thing. It has been said that halving is one of the reasons bitcoin has been such a huge success and is such a revolutionary technological development.
For the first time, a form of money has been created that is profoundly deflationary, has a fixed supply limit (only 21 million bitcoins will ever exist), and can only be produced by investing electricity and computing power.
Compared to national fiat currencies that have unlimited supply and can be created out of thin air, bitcoin is incredibly scarce.
Some say that bitcoin is the “hardest” money ever known, meaning that bitcoin is hard to create and has a limited supply.
In this sense, bitcoin is similar to gold. Gold also has to be mined and has a scarce supply. This is why bitcoin is sometimes referred to as “digital gold.” You can start buying and selling cryptocurrency today through SoFi Invest.
Is Buying Bitcoin Before a Halving a Good Idea?
To answer this question, it could be helpful to look at previous halvings. So far, there have been three since bitcoin’s inception in 2009.
Halvings have occurred in the following years, with the block rewards being reduced as follows:
• 2012: 25 bitcoins
• 2016: 12.5 bitcoins
• 2020: 6.25 bitcoins
When is bitcoin halving next? The next halving will occur in 2024, when the block reward will be reduced to 3.125 bitcoins.
Historically, the bitcoin price has increased dramatically in the 18 months following the halving.
After the first halving occurred in 2012, bitcoin hit a record high high of over $1,000 in November 2013. In April of that year, before the halving, bitcoin was trading at less than $50.
The second halving occurred in 2016. In December 2017, bitcoin hit a record high of nearly $20,000, up from less than $1,000 in January of that year.
In general, bitcoin tends to rise rapidly at some point after the halving. Then there’s a crash, sometimes resulting in drawdowns as large as 90%. After stagnating for some time, the price then begins appreciating slowly leading up to the next halving, and the cycle repeats.
This is an oversimplified version of events but it offers a general sense of how halving bitcoin has impacted prices historically. That said, past performance does not always indicate future results.
At the time of writing, bitcoin has risen to over $15,000 from its 2020 lows of around $4,000, after the halving that occurred in May 2020.
Has the pattern begun repeating itself?
Time will tell.
Bitcoin halving, when the amount of coins miners receive in exchange for processing transactions get cut in half, occurs once every four years. There have been three halvings so far as of the time of writing.
Historically, bitcoin has increased in price following the halving. This trend follows patterns set by the law of supply and demand. Less supply of something means its price will increase, so long as demand remains steady or increases.
This fundamental economic advantage is part of what makes bitcoin unique as a store of value. The only other form of money that shares similar characteristics is gold, leading some to call bitcoin “digital gold.”
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