What is Bitcoin halving — and why should you care?
One of the most anticipated events in cryptocurrency is nearly here: the next Bitcoin halving. But what is it — and why should you care?
5 min read
The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products, or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset. Cryptocurrencies are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.The ultimate countdown party in the cryptocurrency world is coming. We're talking about Bitcoin halving, an event that happens roughly every four years and one of the foundational protocols of this cryptocurrency.But what exactly is Bitcoin halving, and why should you care? This article is your VIP pass to the inner workings of one of the most significant events in the Bitcoin universe. We're diving deep into Bitcoin halving — what it is, why it matters, and how it could shake up the entire crypto landscape (again).
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Bitcoin halving is a key event in cryptocurrency, occurring approximately every four years. At its core, Bitcoin halving is a process built into the Bitcoin protocol that reduces the rate at which new Bitcoins are created and added to the circulating supply. This reduction happens by half, impacting the block reward that miners receive for successfully mining new blocks on the Bitcoin blockchain. This means that the number of new Bitcoins generated decreases, reducing the overall rate of Bitcoin available for mining. This scarcity mechanism is designed to control inflation and ensure that the total supply of Bitcoin remains limited to 21 million coins — another important part of the Bitcoin protocol. As a result, the cryptocurrency community and investors alike closely watch Bitcoin halving events, as they’ve historically been associated with significant price movements and can have profound implications for the future of Bitcoin's value and adoption.
Why does Bitcoin halve?
The halving mechanism is a key feature built into the Bitcoin network to manage the issuance of new Bitcoins and maintain scarcity. By halving the block reward that miners receive for successfully mining new blocks, Bitcoin's protocol effectively reduces the rate at which new Bitcoins are created and added to circulation. This gradual reduction in the supply growth rate is intended to mimic the gradual issuance of precious metals like gold, creating a system where the supply of Bitcoin becomes increasingly limited over time. Ultimately, the halving mechanism strengthens Bitcoin's ethos of being a decentralized and finite digital asset.
How does Bitcoin halving work?
When Bitcoin was first launched in 2009, miners received a reward of 50 Bitcoins (BTC) for each block they successfully mined. However, this reward is halved approximately every 210,000 blocks (or roughly every four years). So, after the first halving, in 2012, the reward dropped to 25 BTC per block, then to 12.5 BTC in 2016, and so on.When the predetermined block height is reached, it signals the occurrence of a halving event, and the block reward is automatically reduced by half. Miners who successfully mine a new block after the halving will receive the new, reduced reward for their efforts.
What happened in the last Bitcoin halving?
The last halving happened on May 11, 2020. During this event, the block reward for miners was reduced from 12.5 BTC to 6.25 BTC per block, effectively cutting in half the rate at which new Bitcoins were created and added to circulation. This was the third halving in Bitcoin's history, following previous halvings in 2012 and 2016.
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The next Bitcoin halving is on the horizon: It should happen around April 2024, when the number of blocks hits 740,000. Currently, miners get 6.25 BTC as a reward for each block they mine. But when the next halving hits, that reward will be cut to 3.125 BTC per block. We can't pinpoint the exact date of the halving because the time it takes to generate new blocks can vary. On average, though, the network churns out one block every ten minutes.
Bitcoin halving: the impact on price
In the lead-up to the 2020 halving, there was significant anticipation and speculation within the cryptocurrency community about its potential impact on Bitcoin's price.Historically, Bitcoin halving events have been associated with increased price volatility and, in some cases, substantial price appreciation in the following months. Following the 2020 halving, Bitcoin experienced a period of heightened price activity, eventually reaching new all-time highs in late 2020 and early 2021. “Looking at past data, we can see that the price of Bitcoin peaks,” says Guido Lonetti, Head of Product Investments at N26. “And Bitcoin has a lot of correlation with other currencies, making a general impact in the crypto market. People are optimistic about the halving impact, but we have to wait and see how it goes,” he concludes. While Bitcoin halving events can have a bullish impact on price, they aren’t guaranteed to result in immediate or sustained price increases. Market dynamics, investor sentiment, macroeconomic factors, regulatory developments, and other variables can all influence Bitcoin's price movements in the short and long term. Investors should approach Bitcoin halving events cautiously and do their research thoroughly before making investment decisions.
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FAQs
When all 21 million Bitcoins have been mined, Bitcoin mining will no longer generate new coins. At that point, miners will rely solely on transaction fees as their reward for validating transactions and securing the network. This transition from block rewards to transaction fees is an essential aspect of Bitcoin's design, aiming to ensure the sustainability and security of the network in the long term.
Although there’s never a guarantee for how to profit from Bitcoin halving, there are several strategies, including long-term investment, short-term trading, derivatives trading, mining, and diversification. Long-term investors may buy and hold Bitcoin in anticipation of prices going up, driven by the halving event's scarcity narrative. Traders may capitalize on short-term price movements and heightened volatility around the halving by buying before and selling afterward. Derivatives trading lets investors speculate on Bitcoin's price movements through futures and options contracts. Mining can be profitable, especially around the halving, but requires significant upfront investment and ongoing costs. Diversifying cryptocurrency holdings beyond Bitcoin can spread risk and potentially capture gains from other assets affected by the halving. No matter what, it's crucial to approach all of these strategies with caution, as Bitcoin's price is highly volatile. We can’t say it enough — there are no guarantees!
