Bitcoin Halving - In Depth

A Bitcoin halving is a special and exciting event that happens approximately every four years in the Bitcoin network. It plays a crucial role in the cryptocurrency system, acting as a way to control the supply and increase the rarity of Bitcoin. This event has a significant impact on the Bitcoin ecosystem, affecting aspects like supply, mining, and price dynamics.

The process is designed to ensure that the rate at which new bitcoins are introduced gradually declines until it reaches a cap of 21 million coins. This limited supply makes Bitcoin a deflationary asset, as its availability becomes scarcer with each halving event. 

WHAT HAPPENS TO BLOCK REWARD?

Simply put, the block reward that miners earn for verifying and adding new blocks to the network is reduced as a result of the bitcoin halving. The block reward is the number of newly created bitcoins given to miners as an incentive for securing the network and validating transactions. During halving, this reward is cut in half. With each passing Halving, miners find themselves facing a new challenge. As the block reward is reduced, they must adapt to the increasing difficulty of mining by harnessing more powerful equipment.

The 800,000th block of the Bitcoin blockchain was mined on July 24, 2023. This is a significant milestone, as it brings the network one step closer to the next halving event.There have been three halvings in the history of Bitcoin:

• November 28, 2012: The reward for mining a block was cut from 50 BTC to 25 BTC.

• July 9, 2016: The reward for mining a block was cut from 25 BTC to 12.5 BTC.

• May 11, 2020: The reward for mining a block was cut from 12.5 BTC to 6.25 BTC.

IMPACT OF HALVING

The halving events have had a number of effects on the Bitcoin network. First, they have reduced the rate at which new Bitcoin is created. This makes Bitcoin more scarce, which could potentially drive up the price. Second, the halving events have reduced the amount of revenue that miners receive. This could lead to some miners becoming less profitable, or even shutting down their operations.

The halving events have also been observed to have a positive impact on the price of Bitcoin. In the past, the price of Bitcoin has typically increased in the months leading up to the halving, and then continued to rise in the months following the halving.

After the last halving, the Bitcoin network will reach its maximum supply of 21 million BTC. This means that there will be no more new Bitcoin created, and the supply of Bitcoin will be fixed. It is unclear what will happen to the price of Bitcoin after the last halving. Some analysts believe that the price could continue to rise, as Bitcoin becomes more scarce.

BITCOIN INFLATION RATE

During the first four years after its launch in 2009, Bitcoin had a high and relatively volatile inflation rate due to the block reward being 50 BTC. As halvings occur every four years, the inflation rate gradually decreases. After the third halving in 2020, the inflation rate dropped to around 1.8%, and it will continue to decrease with each subsequent halving event.

DIFFICULTY ADJUSTMENT

Bitcoin mining difficulty measures how hard it is to create a new block on the Bitcoin network. It depends on how much computing power is used for mining. It is calculated based on the total hash rate of the network, which is the total amount of computing power that is being used to mine Bitcoin.

Bitcoin difficulty adjustment is a process that occurs every 2,016 blocks (about two weeks) to ensure that the average block time remains at 10 minutes. If the hash rate of the network increases, the difficulty will increase to make it more difficult to mine new blocks. Conversely, if the hash rate of the network decreases, the difficulty will decrease to make it easier to mine new blocks.

The Bitcoin difficulty adjustment algorithm is designed to maintain a target block time of 10 minutes by considering the total network hashrate over a 2016-block period. If blocks are discovered faster than the target time due to increased hashrate, the difficulty increases to make block finding harder. Conversely, if hashrate decreases, the difficulty is reduced to make block finding easier. This adaptive technique ensures network resiliency and aids in the stabilisation of new bitcoin supply.  The "halving event" slows the rate at which new bitcoins enter the market by halving the block reward every four years.

Bitcoin has a maximum supply of 21 million coins, and once all 21 million coins have been mined, no more coins will be created. After this moment, miners' only source of income will be transaction fees. This could reduce the number of miners, but higher demand for Bitcoin could compensate. After all 21 million coins are mined, the Bitcoin network will continue to operate, relying on transaction fees for security and processing.

The price of Bitcoin following this incident is unpredictable, with some analysts forecasting a gain due to scarcity and others predicting a decline due to decreased demand. Overall, the Bitcoin network is intended to be self-sustaining long after the last Bitcoin has been mined.