Bitcoin Halving: How It Works and Why It Matters (2024)

Bitcoin halving is when the reward for Bitcoin mining is cut in half and takes place every four years.

The halving policy was written into Bitcoin’s mining algorithm to counteract inflation by maintaining scarcity. In theory, the reduction in the pace of bitcoin issuance means that the price will increase if demand remains the same.

At the moment, Bitcoin has an inflation rate of less than 2%, which will decrease with further halvings, says David Weisberger, CEO of trading platform CoinRoutes. That’s looking pretty good compared with the 7% Australian annual inflation rate.

“Bitcoin’s production scarcity is what defines its finiteness, and when reward goes down, supply is constrained,” says Chris Kline, chief operating officer of Bitcoin IRA. “Increasing demand at a time when supply is constrained has a positive impact on price, which can make bitcoin alluring to investors.”

A decentralised network of validators verifies all Bitcoin transactions in a process called mining. They are paid 6.25 BTC when they are the first to verify a block of transactions, using complex math to add it to the Bitcoin blockchain as part of its proof-of-work mechanism.

At the current bitcoin price, 6.25 BTC is worth about US$290,000 as of January 2024, a decent incentive for miners to keep adding blocks of bitcoin transactions.

Those blocks of transactions are added roughly every 10 minutes, and the Bitcoin code dictates that the reward for miners is reduced by half after every 210,000 blocks are created. That happens roughly every four years in periods that are often accompanied by heightened bitcoin price volatility.

Related: Different Ways to Invest in Bitcoin

The first bitcoin halving occurred in November 2012. The following halving was in July 2016, and the most recent halving was in May 2020.

The mining reward, or subsidy, started at 50 BTC per block when Bitcoin was createdin 2009. The amount drops in half each time a new halving takes place. For instance, after the first halving, the reward for Bitcoin mining dropped to 25 BTC per block.

The last halving will occur in 2140. At that point, there will be 21 million BTC in circulation and no more coins will be created. From there, miners will just earn transaction fees paid by users transacting on the blockchain.

Richard Baker, CEO of miner and blockchain services provider TAAL Distributed Information Technologies, points out that miners may shift transaction processing power away from BTC once the next halving occurs as they seek more transaction fees elsewhere to make up for lost Bitcoin revenue.

Fewer miners would mean a less secure network, experts say.

On the other hand, while the halving reduces the reward for miners, it equally lowers the supply of new coins without reducing the demand, notes Patricia Trompeter, CEO of cryptocurrency miner Sphere 3D Corp.

“If the economic theory holds true, which historically for Bitcoin it has, Bitcoin prices should increase dramatically in response to the supply shock,” she says. “Although, there is still debate on whether the historical price movement around each halving was a direct product of the halving.”

Higher prices would be an incentive for miners to keep processing Bitcoin transactions.

The Bitcoin algorithm dictates that the halving happens based on a specific number of newly created blocks. Nobody knows precisely when the next halving will occur, but experts point to May 2024 as an anticipated date. That would be almost exactly four years since the last one.

Experts say the somewhat predictable nature of Bitcoin halvings was designed so that it’s not a major shock to the network.

But that doesn’t mean there won’t be a trading frenzy surrounding Bitcoin’s next halving.

“Historically, there is a lot of Bitcoin price volatility leading up to and after a halving event,” says Rob Chang, CEO of Gryphon Digital Mining, a privately held Bitcoin miner. “However, the price of Bitcoin typically ends up significantly higher a few months after.”

While many other factors influence Bitcoin’s price, it does seem that halving events are generally bullish ones for the cryptocurrency after initial volatility eases.

Baker says investors should be cautious about the next Bitcoin halving. Although scarcity can drive price appreciation, reduced mining activity could cause the price to level off.

“The key point for investors to consider, however, isn’t the specific dates of halving events but to focus on the growth of the network overall,” Weisberger says. “As long as the network continues to grow, the likelihood of Bitcoin fulfilling its potential as a global store of value increases.”

This article is not an endorsem*nt of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency or CFDs as an investment class. Cryptocurrency is unregulated in Australia and your capital is at risk. Trading in contracts for difference (CFDs) is riskier than conventional share trading, not suitable for the majority of investors, and includes the potential for partial or total loss of capital. You should always consider whether you can afford to lose your money before deciding to trade in CFDs or cryptocurrency, and seek advice from an authorised financial advisor.