What is “The Halvening,” and why does it matter?

In a nutshell: “The Halvening” is a predetermined event in Bitcoin's algorithm that halves the reward that miners receive for validating transactions. It occurs roughly every four years. It matters because it’s designed to control the supply of new Bitcoins entering circulation and prevent inflation, mimicking the scarcity effects seen in real-world mining of gold. 

What is Bitcoin halving?

Fondly referred to as “the Halvening” in the cryptocurrency community, Bitcoin halving—an event that happens around every four years—has been hotly anticipated each time, ever since the first Bitcoin was mined in 2009. Three Halvenings have already taken place, with the fourth expected by mid-April of 2024.

The actual thing that’s halved by this event is the award given to Bitcoin miners—in the form of bitcoins—for validating network transactions. This event is an automated policy hardwired into the Bitcoin protocol as a countermeasure against inflation. With each halving, it becomes progressively harder to mine new bitcoins, thereby increasing the value of each individual token, even as more tokens are introduced into the supply stream.  

This deflationary mechanism is one of the reasons for Bitcoin’s popularity, and why it is often compared to gold and used as a hedge against inflation. 

Bitcoin as digital gold

To better understand the Halvening, we can talk about it in terms of traditional fiat currencies. 

Fiat currencies, such as the US dollar or Philippine peso, have no fixed supply and are issued as needed by their respective central banks. In the same vein, when banks issue loans, they’re technically creating new money. This process greatly accelerates growth but has a major drawback: when the rate of new money being created outpaces demand for the currency, it lowers the value of each unit of that currency. That phenomenon is inflation.

The inflation problem was one of the reasons why Bitcoin was invented. Bitcoin was designed with specific features to counteract inflation. First, Bitcoin’s maximum supply was fixed at only 21 million tokens. That meant that only 21 million bitcoins will ever be created—for all time. 

Second, the process of issuing new bitcoins involves a complex process known as mining. Since Bitcoin is a decentralized network, the tasks of processing and validating transactions are outsourced to miners instead of being housed in a central server. Miners use powerful computers to solve cryptographic puzzles and authenticate network transactions. In return, they are rewarded with newly minted bitcoins. 

Bitcoin’s blockchain protocol, the immutable ledger created by Bitcoin mining, ensures the security of the entire network and attributes value to the tokens. Since mining bitcoins requires significant effort and hardware, miners can sell their bitcoins for a high price and make a profit in the same way that gold is expensive because of the effort required to dig it up. 

Just as mining gold gets more difficult as the available supply dwindles, every Halvening means miners receive fewer bitcoins every four years, or roughly every 210,000 blocks. Those diminishing returns naturally increase demand and raise the price of bitcoins.

The Halvening timeline

When Bitcoin launched in 2009, miners were awarded 50 BTC for every block mined. That amount was reduced to 25 BTC after the first halving in 2012, and further reduced to 12.5 BTC in 2016. The last halving in 2020 brought the awarded amount to 6.25 BTC. 

This reduced supply demonstrates dramatic impact on Bitcoin’s long-term market performance, while significant price volatility is typically observed during the time leading up to and immediately after a Halvening. 

Bitcoin halving and sustainability

Critics argue over the sustainability of the halving protocol as each event requires miners to acquire more expensive hardware and consume more energy to maintain the network’s hashrate.

For instance, after the 2000 halving, the network saw miners selling most of their bitcoins to acquire more mining rigs in anticipation of the next halving event. In turn, some miners repurposed their mining hardware to transition into the AI industry, where demand for high-end computer chips is at an all-time high. 

On the other hand, Bitcoin halving has also sparked demand for development in cheaper, renewable energy, as miners seek alternative power sources for continuing their operations. 

The future of Bitcoin

As of this writing, over 19 million bitcoins have already been mined out of the 21 million total supply. That may seem like the maximum is near, but not so. Thanks to the halving mechanism, it will take approximately 116 more years—and 29 more Halvenings in that time—to mine the remaining tokens, with the last block reward estimated to occur in 2140. 

After all Bitcoins have been mined, the network will no longer produce new bitcoins, instead, miners will be rewarded with subsidies from the transaction fees. But that’s a concern for next century’s cryptocurrency vanguard.

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