Leily R.
Leily R.
Dec 06, 2021

Bitcoin Halving : A Beginner's Guide

tl;drEvery four years, the number of Bitcoins that are distributed to the miners as rewards are cut in half. Due to the law of supply and demand, as price increases, people are willing to supply more and demand less, and vice versa when the price falls. Banks print more money for reaching specific economic goals, but this will cause inflation over time. However, Bitcoin aims to achieve a deflationary process via halving events since there will be less and less of it as time passes. Bitcoin halves its block reward in every 210,000 blocks, and with each block taking 10 minutes to be solved, it makes the halving event happen in almost four years.
Bitcoin Halving : A Beginner's Guide
Bitcoin Halving : A Beginner's Guide
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Introduction

If you're new to crypto and have been keeping an eye on Bitcoin, you probably have heard of the Bitcoin Halving event. In short terms, every four years, the number of Bitcoins that are distributed to the miners as rewards are cut in half. From 2009 to 2012, the amount of rewarded Bitcoins was 50 BTC. Then, from 2012 to 2016, the rewards got cut in half, meaning it got reduced to 25 BTC. And again, from 2016 to 2020, the reward got cut in half, making it 12.5 BTC. As of now, the reward is cut in half again and is currently 6.25 BTC. You guessed it, it will be cut again in 2024 and will be reduced to 3.125 BTC. Before we dig deeper into the reasoning behind this mechanism, we need to learn what Proof-of-Work is.

Proof of Work

Proof of work is a consensus mechanism that uses a significant amount of mining power to verify transactions or eliminate fake users. It was initially designed to solve the problem of "double-spending". Transaction data is stored permanently and safely in blocks of the blockchain. Each block of the Bitcoin blockchain contains a list of up to 100 recent transactions. The new block is directly tied to the previous block. With that being said, what people do by mining the blocks is that they're actually using their computing power to add new blocks by finding the hash of the previous block. By finding the hash, the block is "solved" and is added to the network. The exact mechanics of hashing function and how miners solve blocks are out of the scope of this post. But in simpler terms, mining is guesswork, and every time someone guesses the hash to the block correctly, the block is solved, and they receive rewards.

Why Halving is Necessary

The answer lies in understanding the law of supply and demand. Generally, as price increases, people are willing to supply more and demand less, and vice versa when the price falls. Banks can print more money to reach specific economic goals. The issue with this is if the price stays the same, printing more money will cause inflation. If BTC is created too quickly and there's no end to the number of distributed BTC, many Bitcoins would've been in circulation, and they would have little value. However, Bitcoin was designed to be valuable. 

Inflation & Deflation

Bitcoin aims to achieve a deflationary process via halving events since there will be less and less of it as time passes. In theory, if the demand stays the same but BTC is lost each year, the price should increase for the amount that has been mined. Another reason for this can be people accidentally making BTC transactions to wallets which they do not have access to.

What Ethereum's Lead Developer Has to Say

Vitalik Buterin explains the need for slowing down the distribution of BItcoins in Bitcoin Magazine as the following:

"The main reason why this is done is to keep inflation under control. One of the major faults of traditional, "fiat" currencies controlled by central banks is that the banks can print as much of the currency as they want. If they print too much, the laws of supply and demand ensure that the value of the currency starts dropping quickly. Bitcoin, on the other hand, is intended to simulate a commodity like gold. There is only a limited amount of gold in the world, and with every gram of gold that is mined, the gold that still remains becomes harder and harder to extract. As a result of this limited supply, gold has maintained its value as an international medium of exchange and store of value for over six thousand years, and the hope is that Bitcoin will do the same." 

Bitcoin's Clock

Bitcoin actually is not using the real-world time to determine when the miner's reward needs to be cut in half. It uses its own block numbers like a clock. Bitcoin has its own internal clock, and it aims that, on average, every 10 minutes, a new block is created or solved by the miners. How it achieves this is by changing the 'difficulty of the blocks on a 14-day basis. Bitcoin makes the blocks easier or harder depending on how many miners have been active on the system for the past two weeks. 

As we said earlier, Bitcoin doesn't use the real-world time to calculate things; therefore, two weeks is almost equal to 2016 blocks. For example, if a lot of miners are active on the system, the chance they solve the block in less than 10 minutes gets higher. Bitcoin adjusts its difficulty and makes it harder for the miners to find the hash so that it takes 10 minutes for the block to get solved.Bitcoin halves its block reward in every 210,000 blocks. With each block taking 10 minutes to be solved, it makes the halving event happen in almost four years.

Halving events can be used by investors and analysts to speculate the price. However, no one knows what will happen to Bitcoin and its impact on other altcoins with every halving event. We’re not financial advicers, and any information on Cryptologi.st is purely for educational purposes. However, we have provided everything you need to compare your options and choose what works best for you. We believe awareness is the key to successful investment decisions.

To quickly compare available options and make the best investment decision, check out our website.

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