What is bitcoin halving, and why is it so important?

Every four years there is an event that miners and bitcoin enthusiasts have been waiting for: halving. A protocol written into the bitcoin code, it largely determines the future of cryptocurrency – and participates in price fluctuations.

Many big events take place every four years: whether it’s Euro football, leap years, or even the Summer Olympics, many fans look forward to the next edition each time. For miners and cryptocurrency enthusiasts, this is the halving bitcoin.

Since the creation of bitcoin in 2008, there have only been 3 halvings, the last of which in May 2020. Although this is a fairly new practice, halving has always marked the world of cryptocurrencies, and the periods that The preceding ones are the occasion to speculate and to question oneself. Because each halving is an event of special significance, which reminds us that miners are getting closer and closer to the end of bitcoins every day.

What is halving?

Halving, in English, means division by two. And that is exactly what is happening.

Miners receive a set number of bitcoin as a reward for their work on the blockchain and for mining a new block. This amount was fixed from the conception of bitcoin by Satoshi Nakamoto. In the early days of bitcoin, a miner received 50 bitcoins for each new block. But this situation has since changed: during the first halving, in 2012, the reward granted to minors increased to 25 bitcoins. In 2016, during the second halving, it rose to 12.5.

Since the last halving of 2020, miners only receive 6.25 bitcoins for each new block. During the next halving, which is due to take place in 2024, the remuneration will increase to 3.125 bitcoins, and so on.

Why did you put this halving system in place?

Unlike conventional currency, bitcoin has a fixed number of units: it was decided that there would only be 21 million bitcoins produced. It is this peculiarity that makes it such a rare commodity, like gold: there is a limit. And once it is reached, there will never be another mined bitcoin.

Bitcoin // Source: Executium / Unsplash

It is this notion of rarity that gives a product or a metal its value. It is to succeed in giving this aspect to bitcoin that Satoshi Nakamoto decided to impose a limit on bitcoin, to create value. This bitcoin limit has been inserted into the blockchain code, and can never be broken.

It has been calculated that this limit should be reached in 2140, but the exact date when the last bitcoin will be produced has not yet been defined. So far, just over 18 million bitcoins have been mined, or over 88.3% of the total. And with each halving, it will become more difficult to produce a bitcoin, which maintains the longevity of the blockchain – at least until 2140.

Why 21 million?

The sum of 21 million bitcoins was chosen by Satoshi Nakamoto – and he never explained why that number was chosen. However, experts have concluded that there are two very likely hypotheses.

The first assumes that Satoshi Nakamoto chose this number because, in 2009, the total amount of money in circulation in the world was $ 21 trillion. Hoping that bitcoin one day becomes the base currency for the world, a bitcoin would then have a fixed value, corresponding to $ 1 million.

The other assumption is based on the time required to mine a block. Bitcoin parameters now mean that a block is mined approximately every ten minutes, thanks to a protocol that adjusts the difficulty. The number of 21 million would therefore correspond to a mathematical logic, applied simply for a matter of convenience.

How does halving work in practice?

Halving is written into the code. It was planned that it intervenes every 210,000 blocks. With a block being created every 10 minutes, experts have calculated that the next halving should take place in the spring of 2024 – but no one has an exact date yet.

Concretely, the halving does not change anything in the production itself of bitcoin. The difference will be for the miner who produces the 210,001st block and the following ones, who will receive only 3.125 bitcoins as a reward instead of the usual 6.25 bitcoins.

Since halving is written into the bitcoin code, there is nothing special to do or organize: it takes place on its own.

What consequences for bitcoin?

The consequences of halving on the price of bitcoin are not necessarily felt immediately afterwards, but they are very real. The specialized site Investopedia explains that the halvings have always corresponded to times of sharp rise in the price of bitcoin. This trend is also quite logical: the number of bitcoins produced is becoming rarer, which only increases its value.

The first halving, which took place in November 2012, caused the price of bitcoin to drop from $ 12 to $ 1,207 in one year. The second halving occurred in July 2016, when the price was stagnant around $ 650, and a year later bitcoin hit its first peak and hit the all-time high of $ 16,000. “. And the last halving took place in May 2020, just a few months before bitcoin broke its previous high and climbed to over $ 63,000.

The change in the price of bitcoin after the halving // Source: CoinMarketCap

What will happen when there is no more bitcoin?

If the only interest of miners in producing new blocks and ensuring the integrity of the blockchain is to receive remuneration in bitcoin, what will happen when no more bitcoin is produced?

Although this event is not expected before 2140, many people have already looked into the subject, because it is a capital issue. The solution envisaged, for the moment, will be to pay the miners to ensure the proper functioning of the blockchain. Like maintenance costs, in a way.

For now, miners are already receiving transaction fees each time a transaction is entered on the blockchain. These fees are only a very small part of their income, but in the future, they could very well represent all of it, which is sure to inflate the prices.

Do other cryptocurrencies have halvings?

What about other cryptocurrencies? The situation is varied.

Ethereum, the second most popular cryptocurrency behind bitcoin, has no set number of units. So for now, there is no real need for halving – but it also means that the rewards for minors fluctuate. Their value usually varies between 2 ETH and 2.5 ETH, but this has not always been the case. Until 2018, the creation of a block was rewarded with 3 ETH, before miners decided to voluntarily lower the remuneration – in order to increase the price of ethereum. Since then, on the Ethereum Improvment Proposals platform, one user even suggested gradually lowering the price down to 1 ETH.

But other cryptocurrencies have a fixed number of units. For Monero, the limit is set at 18.9 million; and the currency implemented a system of gradual reduction in compensation over time – a less drastic change than that of bitcoin.

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