Bitcoin Mining: Why Halving Matters
Halving means halving and referring to Bitcoin mining means exactly halving the reward for miners.
Halving is of paramount importance to the Bitcoin protocol, because it actually is BTC’s only monetary policy measureand that is what gives Bitcoin its deflationary nature.
In fact, the bounty given to miners is the only way to make BTC.
This prize is encoded in Bitcoin’s code, as is the halving. Thus, halving is a process inherent in the Bitcoin protocol, and immutable.
In addition to being immutable, it is also predictable, and the sum of all this gives Bitcoin its deflationary nature.
The beginning of Bitcoin mining: full rewards for miners and no halving
Basically, when Bitcoin protocol was published on October 31, 2008, there were no BTC, and there was no way to make them.
The protocol originally envisaged 50 BTC to be given as a reward for each mined block. So the first 50 BTC was created when the first block of Bitcoin was mined, on January 3, 2009.
The second block was not mined until January 9, with an additional 50 BTC given as a reward to the miner who mined it. At the time, only 100 BTC existed in total. It is worth noting that the first blocks were mined by Satoshi Nakamoto himself, i.e. the creator of Bitcoin.
Since then, the speed at which a new block can be mined has increased, reaching close to the theoretical average of 10 minutes. So about 6 blocks were mined per hour, or 144 per day. Since 50 BTC were created per block, approx 7200 BTC were created and distributed as prizes to the miners every day.
At that time, there were already other miners besides Satoshi, and the market value of the BTC created was essentially zero.
By the end of 2009 more than 1.6 million BTC had already been created this way, because in reality the average time to mine a block (the block time) was well under 10 minutes.
At the end of 2010, a total of almost 5 million had already been created, and at the end of 2011 almost 8 million. At that time, 1 BTC had become worth about $4, so Bitcoin capitalized approx 32 million dollars.
The first halving
On November 28, 2012, the first halving took place. In other words, the Bitcoin protocol automatically halved the reward for miners to 25 BTC per block.
This also halved the rate at which new BTC was created, since while maintaining the pace of roughly one new block every 10 minutes, around 7,200 BTC were no longer being created each day, but 3,600.
It must be remembered that within the Bitcoin protocol the rule that handles halving mandates that this happens every 210,000 mined blocks. In fact, on November 28, 2012, it was precisely the block number 210,000 that was mined that triggered the first halving.
Most likely, precisely because of the halving of the creation of new BTC, the price of BTC rose the following year to a new all-time high of over $1100.
Since the halving effectively halves the inflation of the Bitcoin money supply, it is more than logical to expect that it could have a positive effect on the price of BTC because it reduces sales pressure.
Mining activity and the relationship with the Bitcoin halving
In fact, at the root it is a problem that can only be solved by selling mined BTC in the market.
Mining is a competition, where the prize is awarded to the individual miner who first succeeds in extracting a block. All the other miners who tried but came later get nothing.
This competition has been won pure computing power, which for Bitcoin is called the hashrate. In other words, the more computing power a miner has (hashrate), the greater their chances of collecting the reward. If they have too little, they will never be able to mine any block and they will never collect any reward.
This pushes miners to have as much computing power as possible, but in doing so, the machines that supply it end up consuming large amounts of power.
As one can easily imagine, such a process generates high costs, which usually have to be paid in fiat currency. Since the only revenue from the mining process is BTC, mined BTC must be sold for cash in fiat currency to finance this expense.
It is not necessarily the case that miners are forced to sell all the BTC they collect from mining, but they are still likely to be forced to sell most of them, especially when their market price is low.
As of November 27, 2012, around 7,200 BTC were still being mined per day, and each BTC had a market value of around $12. So it is possible to imagine that every day the miners tried to collect a total of up to about $86,000 by selling the mined BTC.
From the next day, these numbers were suddenly halved, with the reduction to 3,600 BTC created per day, with a market value of $43,000. This reduced the selling pressure of BTC in the market. In December, the value of BTC had risen to $13 and in January to $14.
The successive halvings: how Bitcoin mining is changing
Bitcoin’s second halving occurred at block number 420,000, mined on July 9, 2016.
At the time, the market value of one BTC was about $670, and although it fell in August, it had risen to $700 by November.
Even then, a huge speculative bubble was triggered the following year, bringing the price of Bitcoin to around $20,000 in December 2017.
It is worth noting that in percentage terms this second bubble was lower than the previous one in 2013.
The third halving occurred at the 630,000 block, mined on May 11, 2020.
At the time, the market value of one BTC was around $10,000, and it continued to hover around this figure until October of that year.
November 2020 triggered Bitcoin’s last major bullrun which ended a year later when it reached a new all-time high of $69,000.
Again, the speculative bubble was smaller in percentage than the previous one.
Bitcoin’s Monetary Policy
BitcoinMonetary policy is just that.
Namely, all BTC are created always and only through the rewards given to the miners, and every 210,000 mined blocks the reward halves. That’s it.
This monetary policy is not only immutable, it is also predictable, so much so that we already know that the next halving should take place in the spring of 2024.
The bottom line is that by virtue of the halving, sooner or later the creation of new BTC will simply cease. It is worth noting that at that point the miners will no longer collect the reward, but will continue to collect the fees paid by those making a transaction. Because of this, they will also be forced to drastically reduce energy consumption.
However, given that it is not that uncommon for the private keys of wallets that BTC is stored in to be lost permanently, and given that without the private keys that BTC stored in the wallet are no longer usable, it is inevitable that over time some BTC will go lost forever this way. When no more new ones are created, around the year 2140, the number of BTC actually in circulation will inevitably begin to decline.
By that time Bitcoin will have become a deflationary currency.
