What is the Bitcoin Halving and why does it matter?


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Every few years, the Bitcoin community buzzes with a single word: Halving. But what is all the noise about? Let's unravel this Bitcoin phenomenon.

What is the Bitcoin Halving?

To understand the Bitcoin Halving, you need to first understand Bitcoin mining. Bitcoin mining is the process where computational work is expended to make past transactions incrementally more difficult to be altered on the Bitcoin network.

What is Bitcoin Mining?

Unlike traditional software systems, Bitcoin’s distributed protocol does not rely on a central arbitrator to maintain itself, nor a dedicated software administrator to help differentiate between a genuine or counterfeit version.

Anyone can download and maintain a copy of the Bitcoin software. As they connect to each other over the internet, they are called nodes. Nodes are akin to referees in a football game - just as having more independent referees makes it harder for anyone to cheat or manipulate the match, having more nodes on the Bitcoin network increases its security and integrity. This is because each node independently verifies and validates transactions, helping to ensure the honesty and accuracy of the entire network.

Each Bitcoin node performs three important functions:

  1. Relaying batches of confirmed transactions called blocks.

  2. Validating a version of the bitcoin software before propagating each block. If a node detects a modified or unrecognised version of the software, it will not pass on the transaction - effectively stopping it in its tracks.

  3. Nodes which are connected to significant computing power can participate in the process of organising unconfirmed transactions from the memory pool into a confirmed block of transactions - this process is called bitcoin mining.

Computing power, backed by real world energy input, ensures a fair system on how new bitcoin generated by the protocol is distributed - the more kwH a miner stakes into their operation, the higher the chance of their node being the first to successfully mine and propagate a new block, thus earning a block reward from the protocol.

Mining becomes progressively harder as more people join the mining network and the size of the rewards halve every 210,000 blocks, or roughly 4 years (an event referred to as a halving).

There are two components of the block reward that incentivises people to participate in bitcoin mining:

  1. Coinbase transaction (not to be confused with the popular cryptocurrency trading platform), which is a form of subsidy where new bitcoin enters circulation. This amount started at 50 BTC per block and the reward is scheduled to halve every 210,000 blocks.

  2. Transaction fees, which is the cost users pay to have nodes confirm their transaction in the blockchain.

Bitcoin’s energy backed security model is what tethers it to the natural world without the need or possibility to rely on a human-backed governance framework. Ultimately, over time, the laws of mathematics and physics prevail over laws which are decided among a population.

There is no central bank to govern the supply of Bitcoin, meaning that its price can’t be supported when it falls, unlike traditional currency and bond markets. As a result, the price of Bitcoin is determined entirely by the free market, governed by the laws of supply and demand. However, Bitcoin has a perfectly inelastic supply curve - where supply cannot keep up with demand, this leads to spikes in price.

Why does the reward halve?

The halving process is what sets Bitcoin’s scarcity function in stone. It's designed to control Bitcoin's supply and ensure its scarcity, where halving ensures only 21 million Bitcoins will ever exist. When the limit of 21 million coins is reached, the reward system will finish and the network will be entirely incentivised by transaction fees paid by the users of the network. This is estimated to occur in 2140.

Have there been previous halvings?

Since Bitcoin's inception in 2009, we've witnessed multiple halvings every four years.

  • 28th November 2012: 25 bitcoin reward
  • 9th July 2016: 12.5 bitcoin reward
  • 11th May 2020: 6.25 bitcoin reward
  • Next halving - April 2024: 3.125 bitcoin reward

These moments have historically been associated with significant price movements and market dynamics.

What happens after halving?

With fewer new bitcoins entering circulation post-halving, scarcity tends to drive the price up. But it's not just about scarcity; investor sentiment and broader market forces also play a role. In markets, scarcity often drives demand. With Bitcoin's capped supply, each halving intensifies this scarcity effect.

How do markets react to the Bitcoin Halving?

Bitcoin, post-halving, has shown resilience and growth, sometimes outperforming traditional assets. Its decentralised nature, coupled with scarcity, makes it a unique asset class.

While Bitcoin has historically seen price hikes post-halving, it’s essential to remember: past performance doesn't guarantee future results. While market reactions to Bitcoin Halving events can be significant, each halving is not a scheme to manipulate prices. It occurs at a predetermined, transparent algorithmic event in the blockchain.

Does halving affect your current Bitcoin?

No, halving doesn’t mean your Bitcoin holdings will be cut in half. And no, miners won’t suddenly vanish. These are just a few of the myths surrounding Bitcoin halving events.

What happens to the network after halving?

Bitcoin's fundamentals have remained strong after each halving event, at least to date. While transaction fees might experience short-term hikes due to miner revenue shifts, the network's security and transaction speeds have remained robust.

When is the next halving?

The most recent halving took place in 2020 and given it occurs approximately every four years, the next Bitcoin Halving is expected to occur in April 2024. However, the exact date can vary slightly depending on the rate of block generation. Keep up to date with Monochrome as the event approaches for the latest news, articles and announcements.

To learn more about the Bitcoin Network, start by exploring Monochrome Research’s Bitcoin Foundational Series.

The content, presentations and discussion topics covered in this material are intended for licensed financial advisers and institutional clients only and are not intended for use by retail clients. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented. Except for any liability which cannot be excluded, Monochrome, its directors, officers, employees and agents disclaim all liability for any error or inaccuracy in this material or any loss or damage suffered by any person as a consequence of relying upon it. Monochrome advises that the views expressed in this material are not necessarily those of Monochrome or of any organisation Monochrome is associated with. Monochrome does not purport to provide legal or other expert advice in this material and if any such advice is required, you should obtain the services of a suitably qualified professional.

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