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Interested in understanding the key elements that influence the supply of Bitcoin? One event that stands out is the “Halving”. This scheduled occurrence plays a vital role in regulating the availability of new bitcoin in the market. Before we get into the “Halving”, you need to understand what is a Bitcoin Miner and how such a miner gets rewarded.
What’s a Bitcoin Miner?
A Bitcoin Miner is a person or organization that uses computer power to help verify transactions on a specific type of digital record-keeping system known as a Proof of Work (PoW) blockchain. The primary job of the Miner is to keep the system secure and trustworthy. For the work completed, the Miner will receive two types of rewards in bitcoin.
The first type of reward is the “block reward”, a set number of newly minted bitcoins that are rewarded to the Miner for successfully adding a new block of transactions to the blockchain. The second is “transaction fees”, which are small amounts of bitcoin collected from users who want to prioritize their transactions for quicker validation and inclusion in a block.
Now that you have an understanding of what is a Bitcoin Miner, lets get into the “halving”.
What’s the Halving?
The “halving” is a key event in Bitcoin mining that halves the “block reward” for generating a new block of transactions to Miners. In other words, the reward of bitcoin to Miners is reduced in half for their efforts. Occurring approximately every four years, this process is hard-coded into the Bitcoin protocol to regulate the total supply of bitcoin, which is capped at 21 million.
The Halving History
When Bitcoin was created, Miners were rewarded 50 bitcoin for each block they mined. The first halving occurred in November 2012, reducing the block reward to 25 bitcoin, then followed by another in July 2016 that reduced the block reward to 12.5 bitcoin. The block reward from the time of this writing is 6.25 bitcoin and the next planned halving date will happen in April of 2024, further lowering the block reward to 3.125 bitcoin. There will be many more halving events with the last one taking place around 2140, at which point Miners will only earn rewards from transaction fees.
Why is the Halving important?
The halving is especially important to people because the Bitcoin protocol’s design key mechanism is to control the supply of new Bitcoin entering circulation. The halving contributes to the following:
Scarcity and Demand
The halving reduces the number of new bitcoins that Miners can earn, making new bitcoins more rare. This limited supply can increase demand, which in turn may push bitcoin's price higher.
Incentive for Miners
Miners play a crucial role in safeguarding the Bitcoin network, and they earn rewards in exchange for their contributions. The continued rewards, despite being reduced by the halving, ensure that Miners have sufficient motivation to keep verifying transactions.
The halving is engineered to position bitcoin as a deflationary asset, which could enhance its long-term value by making it increasingly scarce, much like precious metals such as gold.
A Historical Perspective
Bitcoin's history shows a pattern that many find interesting. A noticeable increase in price typically follows the halving events. Since its inception, Bitcoin has undergone several halvings, and each one has been followed by a period of increased valuation.
It's important to note that many factors can influence bitcoin's price, including market interest and broader economic trends. So while the past has shown a pattern, it's no guarantee for the future. Still, this recurring trend makes the halving a hot topic in the world of Bitcoin and cryptocurrencies.
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