Every four years there is an event that bitcoin miners and enthusiasts have been waiting for: the halving. A protocol written into the bitcoin code, it largely determines the future of cryptocurrency – and participates in price fluctuations.
Many big events take place every four years: whether it’s the Euro football, leap years, or even the Summer Olympics, many fans eagerly await the next edition each time. For miners and cryptocurrency enthusiasts, this is the halving bitcoin.
Since the creation of bitcoin in 2008, there have only been 3 halvings, the last of which was in May 2020. Although it is a fairly new practice, the halving always marks the world of cryptocurrencies, and the periods that the preceding are an opportunity to speculate and question ourselves. Because each halving is an event of special significance, a reminder that miners are getting closer to the end of bitcoins every day — 90% of all bitcoins have already been mined.
What is the halving?
Halving, in English, means dividing by two. And that is exactly what is happening.
To “produce” new bitcoins, they must be mined. To sum up, the miners are put in competition, and must answer equations. The miner who achieves this first receives a set number of bitcoins as a reward for their work on the blockchain. This sum was fixed from the conception of bitcoin by Satoshi Nakamoto, the creator of the cryptocurrency. In the early days of bitcoin, a miner received 50 bitcoins for each new block. This situation has since changed: during the first halving, in 2012, the reward granted to miners was increased to 25 bitcoins. In 2016, during the second halving, it rose to 12.5.
Since the last halving of 2020, miners receive “only” 6.25 bitcoins for each new block. At the next halving, which is due to take place in 2024, the remuneration will increase to 3.125 bitcoins, and so on.
Why did you put this halving system in place?
Unlike conventional currency, bitcoin has a fixed number of units: it was decided that there would only be 21 million bitcoins produced. It is this particularity that makes it a rare commodity, like gold: there is a limit. And once it is reached, there will never be another bitcoin mined.
It is this notion of rarity that gives a product or a metal its value. It is to succeed in giving this aspect to bitcoin that Satoshi Nakamoto decided to introduce a limit to bitcoin, to create value. This limit of bitcoin has been inserted into the code of the blockchain, and can never be transgressed.
It has been calculated that this limit should be reached in 2140, but the exact date when the last bitcoin will be produced has not yet been defined. So far, just over 18 million bitcoins have been mined, or more than 88.3% of the total. And with each halving, it will become more difficult to produce a bitcoin, which maintains the longevity of the blockchain – at least until 2140.
Why 21 million?
The sum of 21 million bitcoins was chosen by Satoshi Nakamoto – and he never explained why this number was chosen. However, experts have concluded that there are two very likely hypotheses.
The first assumes that Satoshi Nakamoto chose this number because, in 2009, the total amount of money in circulation in the world was 21 trillion dollars. Hoping that bitcoin will one day become the base currency for the world, one bitcoin would then have a fixed value, corresponding to $1 million.
The other assumption is based on the time it takes to mine a block. Bitcoin settings now mean that a block is mined approximately every ten minutes, thanks to a protocol that adjusts the difficulty. The number of 21 million would therefore correspond to a mathematical logic, applied simply for a matter of convenience.
How does the halving work in practice?
The halving is written into the code. It was scheduled to occur every 210,000 blocks. With a block being created every 10 minutes, experts have calculated that the next halving should take place in the spring of 2024 – but no one has an exact date yet.
Concretely, the halving does not change anything in the production of bitcoin itself. The difference will only be felt by the miners who produce the 210,001st block and beyond, who will receive only 3.125 bitcoins as a reward instead of the usual 6.25 bitcoins.
Since the halving is part of the bitcoin code, there is nothing special to do or organize: it takes place on its own.
What are the consequences for bitcoin?
The consequences of the halving on the price of bitcoin are not necessarily felt immediately afterwards, but they are very real. The specialized site Investopedia explains that halvings have always corresponded to moments of sharp rise in the price of bitcoin. This trend is also quite logical: the number of bitcoins produced is becoming rarer, which only increases its value.
” The first halving, which took place in November 2012, caused the price of bitcoin to rise from $12 to $1,207 in one year. The second halving occurred in July 2016, when the price stagnated around $650, and a year later bitcoin experienced its first peak and reached the all-time high price of $16,000. “. And the last halving took place in May 2020, just a few months before bitcoin broke its previous all-time high and soared above $63,000.
What will happen when there is no more bitcoin?
If the only interest of miners in producing new blocks and ensuring the integrity of the blockchain is to receive remuneration in bitcoins, what will happen when no more bitcoins are produced?
Although this event is not expected before 2140, many people have already looked into the subject, because it is a crucial issue. The solution envisaged, for the moment, is to remunerate miners to ensure the proper functioning of the blockchain. Like a maintenance fee, sort of.
For the moment, miners already receive transaction fees each time an operation is registered on the blockchain. These fees only represent a very small part of their income, but in the future, they could very well represent all of them, which would certainly inflate prices.
Do other cryptocurrencies have halvings?
What about other cryptocurrencies? The situation is varied.
Ethereum, the second most popular cryptocurrency behind bitcoin, has no set number of units. For now, there is therefore no real need to institute a halving – but it also means that the rewards for miners fluctuate. Their value usually varies between 2 ETH and 2.5 ETH, but this has not always been the case. Until 2018, the creation of a block was rewarded with 3 ETH, before miners decided to voluntarily lower the remuneration – in order to increase the price of ethereum. Since then, on the Ethereum Improvment Proposals platform, a user even suggested gradually lowering the price to 1 ETH.
But other cryptocurrencies have a fixed number of units. For Monero, the limit is set at 18.9 million, and the currency has implemented a system of gradually reducing the remuneration over time – a less abrupt change than that of bitcoin.