What is the Bitcoin Halving?
If a new bitcoin block is found every ten minutes on average, the successful miner receives a reward in bitcoin, the so-called block reward.
The bitcoin halving is a mechanism integrated into the bitcoin protocol that takes place approximately every four years (after every 210,000 blocks mined). At each halving, the block reward is cut in half. The process was developed by Satoshi Nakamoto, the inventor of bitcoin, to create a scarce digital asset.
Good to know: As a result of the imminent halving, bitcoin will be scarcer than gold. While gold's inflation rate is around 1-2%, bitcoin's will fall to around 0.8% after the next halving in April 2024.
How does the Halving affect the Bitcoin Price?
Historically, the price of bitcoin has always risen significantly after a halving. Most often, this phenomenon is explained as follows: When the supply of new bitcoin falls and demand remains at least the same, if not even increases, the price moves upwards.
In the past, the halvings have attracted speculators, investors and enthusiasts alike and have triggered a veritable digital gold rush several times (see table).
However, it can also be observed that the effect of the halving on the bitcoin price is diminishing from halving to halving, as the absolute reduction in block rewards is getting smaller: At the next halving in April, for example, the block reward, which is distributed approximately every ten minutes, is reduced by 3.125 BTC. At the last halving in 2020, the block reward was reduced by 6.25 BTC.
In addition, more and more people know what the halving is and what to expect. According to many, the event has therefore already been priced in.
Significance for Bitcoin Miners
But the halving is not only positive for all network participants: The halving poses major challenges for miners, as their income is halved from one moment to the next. This forces less efficient miners to give up, while surviving miners must adapt and innovate to remain profitable. At the same time, this means that only miners with cheap electricity (often from renewable energy sources) can work profitably in the long term and thus survive.
What happens if the Block Reward gets too small?
At some point, transaction fees will replace block rewards as miners' main source of income. Critics argue that this will not be economically viable. On the other hand, it is argued that advances in transaction batching and other layer-2-technologies are likely to solve this problem.
When is the next Halving?
The next halving, which cuts the bitcoin block reward from 6.25 BTC to 3.125 BTC, is most likely to take place on April 20th.
