The available supply of conventional currencies rises and falls under the control of national central banks, but the total supply of Bitcoin is stable and unchanging.
There will only be 21 million Bitcoins. There are currently just over 19 million mined and just under 2 million left to be created. The Bitcoin protocol automatically reduces the number of new coins issued with each new block in a process called halving.
“One of the most important features of Bitcoin is its limited supply and emission mechanism,” says Bruce Fenton, CEO of fintech company Chainstone Labs. “Bitcoin provides certainty in an uncertain world. It is not people who decide how it will be given, but the code.”
Bitcoin’s transparent and automatic supply management is one of the reasons why proponents of the world’s most popular cryptocurrency see it as a store of value closer to gold than fiat currency.
Bitcoin halving explained
Bitcoin halving is the halving of the reward for mining Bitcoin. Halving occurs every four years.
The halving policy is written into Bitcoin’s mining algorithm to counter inflation by maintaining scarcity. In theory, a decrease in the Bitcoin emission rate means that the price will increase if the demand remains unchanged.
David Weisberger, CEO of trading platform CoinRoutes, says that Bitcoin’s inflation rate is currently less than 2%, and this will decrease with subsequent halvings. Compared to June’s consumer price index (CPI) inflation of 9.1% year-on-year, this looks pretty good.
“Bitcoin’s production shortage determines its finiteness, and supply is limited when the premium declines,” says Chris Kline, chief operating officer of Bitcoin IRA. “At a time when supply is limited, increased demand has a positive effect on the price, which can attract bitcoin investors.”
How does Bitcoin halving work?
A decentralized network of validators verifies all Bitcoin transactions in a process called mining. They are paid 6.25 BTC when they are the first to use complex math to add a group of transactions to the Bitcoin blockchain as part of the proof-of-work mechanism.
At the current Bitcoin price, 6.25 BTC is worth about $148,000, which is a decent incentive for miners to keep adding blocks of Bitcoin transactions.
These transaction blocks are added approximately every 10 minutes, and the Bitcoin code dictates that the reward for miners is halved after every 210,000 blocks are created. This happens about every four years, often accompanied by periods of increased Bitcoin price volatility.
When did the first Bitcoin halving happen?
The first Bitcoin halving took place in November 2012. The next halving was in July 2016, and the most recent halving was in May 2020.
The reward or subsidy for mining started at 50 BTC per block in 2009 when bitcoin was launched. This amount is halved each time a new halving occurs. For example, after the first halving, the reward for Bitcoin mining dropped to 25 BTC per block.
The last halving will happen in 2140. At this point, there will be 21 million BTC in circulation and no more coins will be created. From there, miners will only be paid in transaction fees.
Richard Baker, CEO of miner and blockchain services provider TAAL Distributed Information Technologies, notes that after the next halving, transaction processing power may shift away from BTC as miners seek more transaction fees elsewhere to compensate for lost Bitcoin revenue.
According to experts, fewer miners mean a less secure network.
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 the economic theory is correct, as it has historically been for Bitcoin, Bitcoin prices should rise sharply in response to a supply shock,” he said. “Although there is still some debate as to whether the historical price movement around each halving is a direct product of the halving.”
Higher prices would be an incentive for miners to continue Bitcoin transactions.
When is the next Bitcoin halving?
The Bitcoin algorithm dictates that a halving occurs based on the creation of certain blocks. No one knows for sure when the next split will happen, but experts point to May 2024 as the expected date. It would be almost four years since the last one.
According to experts, the somewhat predictable nature of the Bitcoin halving was designed so as not to cause a huge shock to the network.
But that doesn’t mean there won’t be a trading frenzy surrounding the next Bitcoin halving.
“Historically, there is a lot of Bitcoin price volatility before and after a halving event,” says Rob Chang, CEO of Gryphon Digital Mining, a private Bitcoin miner. “However, the price of bitcoin usually rises significantly after a few months.
While there are many other factors that affect the price of Bitcoin, halving events generally seem to be bullish for the cryptocurrency after reducing initial volatility.
Baker says investors should be cautious about the next Bitcoin halving. While scarcity can cause prices to rise, reduced mining activity can cause prices to fall.
“The key thing for investors to consider is not the specific dates of the halving events, but the overall growth of the network,” says Weisberger. “As the network continues to grow, Bitcoin is more likely to fulfill its potential as a global store of value.”