Bitcoin Halving: How it works and Why it matters
A “block” is a file containing 1 megabyte (MB) of Bitcoin BTC $44,010
transaction records on the Bitcoin blockchain. “Miners” compete to add the next block by solving a complex mathematical problem using specialized hardware, producing a random 64-character output known as a “hash,” finishing the process and locking the block so it can’t be changed. By completing these blocks, miners receive Bitcoin.So, how does the Bitcoin halving cycle work? Miners were paid 50 BTC per block when the cryptocurrency was originally established. Early users could be enticed to mine the network in this fashion, even before it was evident how successful it would be. The rate at which new Bitcoin is created decreases by half for every 210,000 blocks mined — roughly every four years.
As per Bitcoin halving dates history, the last three halvings occurred in 2012, 2016 and 2020. The first Bitcoin halving, or Bitcoin split, occurred in 2012 when the reward for mining a block was reduced from 50 to 25 BTC.
Why does Bitcoin halving occur?
Bitcoin halving occurs as part of the protocol’s design and is a key mechanism to control the supply of new Bitcoin entering circulation. The primary reasons for Bitcoin’s halving are:
Scarcity and controlled supply
Satoshi Nakamoto, the person or group of people who invented Bitcoin, wanted to create a digital currency with a constrained and managed supply. Reducing the mining rewards by half decreases the rate at which new Bitcoin is generated. Due to its rising scarcity over time, Bitcoin has a valuable value proposition as a deflationary asset.
Inflation control
The Bitcoin halving contributes to limiting excessive inflation in the Bitcoin ecosystem. The rate at which new Bitcoin reaches the market is decreased by lowering the block reward. This restricted issuance process aims to keep the coin stable and valuable in the long term.
Market forces and economics
The halving event has economic repercussions for both Bitcoin miners and the broader market. Miners must modify their operations to be profitable with a lower block reward, which increases competition and drives away less productive miners. This, in turn, can impact the overall security and decentralization of the network.
