What is a Bitcoin block halving?
The next bitcoin block halving is expected to take place in:
One of the most important characteristics of Bitcoin is that there’s a cap on the amount of bitcoins that will ever be in circulation. The creation of new bitcoins is predictable and transparent to everyone. This is different from the traditional banking sector, where central banks can keep printing more money, almost without limitations.
An important term in the world of bitcoin that concerns the limited supply is the so-called block halving. What is a block halving? And why is it important? You’ll read it here.
Important questions regarding bitcoin block halving:
- Where do new bitcoins come from?
- What is a block halving?
- What does the bitcoin block halving mean for miners?
- What happens to the bitcoin price after a block halving?
- What happens after the last block halving ever?
Where do new bitcoins come from?
In order to understand what a bitcoin block halving means, it’s helpful to understand how new bitcoins are created.
There will be a limited amount of bitcoin; in total there will be 21 million. Well, to be exact there will be 20,999,999.9769 bitcoin, but 21 million is slightly easier to pronounce. The cap in the circulating supply is predetermined and enforced by the Bitcoin protocol. The coins will be released in a predictable tempo, by means of block rewards.
A block reward is an amount of bitcoin that miners receive as a reward for their work. Miners maintain and secure the bitcoin network, mainly by adding new transaction-filled blocks to the already existing chain of blocks, the blockchain. It’s crucial and important work, which is why it is rewarded.
At the moment the reward per block is 6.25 bitcoin. These are newly created bitcoins that are added to the current supply. The block reward is halved approximately every four years, which is referred to as the block halving.
What is a block halving?
The bitcoin block halving is the moment that the miner reward per block is divided by two. This halving takes place every 210,000 blocks. Mining one block takes ten minutes on average, so it can be estimated that there is a bitcoin block halving approximately every four years. This continues until 21 million bitcoins are circulating. On top of this page you can see how long it will take until the next halving.
What does the bitcoin block halving mean for miners?
Creating bitcoin is expensive, but miners can make a profit when their income, the block reward, exceeds the costs. These costs include energy bills, equipment, and insurance for the equipment.
The bitcoin block halving can be predicted, so miners know precisely to the day when the reward in bitcoin is halved. In that respect, the block halving provides some certainty for miners. But there is also uncertainty. The computing power on the network has been unstable for years, just like the delivery time of mining equipment.
It may sound as if the miners receive less income after the halving, but halving the reward in bitcoin does not necessarily mean halving the reward in euros or dollars. Does the demand remain constant and is the supply growth slowing down? Then the price can rise in the future. But the role of transaction costs can also become greater. In this way, miners still receive sufficient compensation for their work.
What happens to the bitcoin price after a block halving?
After a block halving, the amount of bitcoin a miner receives when he finds a block gets halved. When the very first block was mined, the reward was a staggering 50 bitcoin, although the market value at that time was nearly zero. After the first halving, the reward was reduced to 25 bitcoin, and the current reward per block is 12.5 bitcoin. The corresponding value in a fiat currency such as the dollar or euro is different at any given time, depending on the bitcoin price.
Some traders believe that a bitcoin block halving affects the price directly. The first halving took place in 2012. A year later, bitcoin reached a provisional all-time high. The same thing happened a year after the next halving, in 2017.
Is the block halving responsible for such price activity or is it just speculation? Currently there are 900 bitcoins mined each day, and the vast majority of those coins are sold instantly to cover for the mining expenses. When there is a halving, the number of coins that will be brought into the market will consequently decrease, leading to more scarcity. This is the best logical explanation that reflects on the price increases following block halving.
But will this happen after the last halving in 2020 as well? We really can’t say; the bitcoin price is volatile and since the halving dates are known, the increasing scarcity could already be taken into account leading up to the halving.
What happens after the last block halving ever?
After the last bitcoin block halving, miners will no longer receive a block reward. By this time they will only earn bitcoins through transaction costs. This means transaction costs will play a bigger role in the future.
Does this mean transactions will become more expensive? That doesn’t have to be the case necessarily. There are many developments on the network that will make the expenses manageable.
For example, with the implementation of the Lightning Network. This new technique makes it possible for transactions to take place on a second layer instead of on the actual blockchain itself.
Perhaps smaller transactions will take place on this second layer in the future. The transaction costs for sending coins on the Lightning Network aren’t high, which ensures affordable transactions in the future.
But this is all in the future; we won’t even experience the last block halving ourselves. It is estimated that the last (piece of) bitcoin is mined in the year 2140.