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The available supply of conventional currencies rises and falls under the watchful eyes of national central banks, but the overall supply of bitcoin is fixed and unchanging.
There will only ever be 21 million Bitcoin. Currently, just over 19 million have been mined, leaving just under 2 million to create. The Bitcoin protocol automatically reduces the number of new coins issued with each new block in a process known as halving.
“One of the key characteristics of Bitcoin is its limited supply and issuance mechanism,” said Bruce Fenton, CEO of fintech firm Chainstone Labs. “Bitcoin provides security in an uncertain world. The code, not people, decides how it is spent.”
Bitcoin’s transparent and automatic control over its supply is one of the reasons why proponents of the world’s most popular cryptocurrency see it as a store of value more comparable to gold than a fiat currency.
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What is Bitcoin Halving?
Bitcoin halving sees the reward for bitcoin mining cut in half. The halving takes place every four years.
The halving policy was written into Bitcoin’s mining algorithm to counteract inflation by maintaining scarcity. In theory, slowing Bitcoin’s issuance pace means that if demand stays the same, the price will increase.
Currently, Bitcoin has an inflation rate of less than 2%, which will fall with further halvings, says David Weisberger, CEO of trading platform CoinRoutes. That looks pretty good compared to the 9.1% annualized inflation rate in the June CPI.
“Bitcoin’s production scarcity defines its finiteness, and as the reward falls, supply is constrained,” said Chris Kline, Bitcoin IRA’s chief operating officer. “Increasing demand at a time when supply is limited has a positive impact on the price, which can make Bitcoin alluring to investors.”
How does Bitcoin halving work?
A decentralized network of validators verifies all bitcoin transactions in a process called mining. They get 6.25 BTC for being the first to use complex math to add a group of transactions to the Bitcoin blockchain as part of their proof-of-work mechanism.
At the current bitcoin price, 6.25 BTC is worth around $148,000, a decent incentive for miners to keep adding bitcoin transaction blocks running smoothly.
These transaction blocks are added roughly every 10 minutes, and the Bitcoin Code dictates that miners’ rewards are reduced by half for every 210,000 blocks created. This happens roughly every four years, in periods often accompanied by heightened bitcoin price volatility.
When was the first bitcoin halving?
The first bitcoin halving took place in November 2012. The next halving took place in July 2016 and the last halving took place in May 2020.
The reward or subsidy for mining started at 50 BTC per block when Bitcoin was released in 2009. The amount halves each time a new halving occurs. For example, the Bitcoin mining reward dropped to 25 BTC per block after the first halving.
There will only be 64 halvings in total, with the last in 2140. At that point, 21 million BTC will be in circulation and no more coins will be created. From there, miners are only paid with transaction fees.
Richard Baker, CEO of mining and blockchain service provider TAAL Distributed Information Technologies, points out that miners could shift transaction processing power away from BTC once the next halving occurs, as they charge more transaction fees elsewhere to make up for lost Bitcoin revenue .
Fewer miners would mean a less secure network, experts say.
On the other hand, while the halving reduces the reward for miners, it equally reduces the supply of new coins without reducing demand, notes Patricia Trompeter, CEO of cryptocurrency miner Sphere 3D Corp.
“If economic theory is correct, which is historically true for bitcoin, bitcoin prices should rise dramatically in response to the supply shock,” she says. “Although there is still debate as to whether the historical price movement around each halving was a direct product of the halving.”
Higher prices would incentivize miners to continue processing bitcoin transactions.
When will the next bitcoin halving be?
The Bitcoin algorithm dictates that the halving occurs based on a specific creation of blocks. No one knows exactly when the next halving will occur, but experts are pointing to May 2024 as the expected date. That would be almost exactly four years since the last one.
The somewhat predictable nature of the bitcoin halvings was designed not to be a major shock to the network, experts say.
But that doesn’t mean there won’t be a trading frenzy at the next Bitcoin halving.
“Historically, there has been a lot of bitcoin price volatility before and after a halving event,” said Rob Chang, CEO of Gryphon Digital Mining, a privately held bitcoin miner. “However, the price of bitcoin is usually significantly higher a few months later.
While there are many other factors affecting Bitcoin’s price, it appears that halving events are generally bullish for the cryptocurrency after initial volatility has subsided.
Baker says investors should be cautious about the next bitcoin halving. Although scarcity can cause the price to increase, reduced mining activity could cause the price to level off.
“However, the most important point for investors to consider is not the specific dates of the halving events, but to focus on the growth of the network as a whole,” says Weisberger. “As long as the network continues to grow, the likelihood of Bitcoin realizing its potential as a global store of value increases.”
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