Every week Blockchain Sensei will be walking you through the basics of blockchain technology. Consider this your crash course in all things web3!
Lately, you may have heard reference to something known as the Bitcoin halving, or “halvening.” To the uninitiated, this might suggest splitting a Bitcoin into two equal parts and if that’s your first thought, you’re on the right track. However, to fully understand the meaning of Bitcoin halving we must first understand exactly how new Bitcoins are issued into circulation.
This process is called Bitcoin mining and understanding it is critical for a complete grasp of Bitcoin halving and its immense significance in the 4-year cycle. New Bitcoins are issued to miners as a reward for validating the information of a block in a blockchain. This is done by generating a cryptographic solution that matches a certain criteria. The miner who reaches the correct solution first is rewarded for their work with Bitcoin. The maximum number of Bitcoins that can ever be mined is capped at 21 million. Once this number is reached, miners are expected to receive fees in return for their continued work.
How does this all tie into Bitcoin halving? The initial block reward (number of Bitcoins rewarded to miners for completing a full blockchain block) was 50 Bitcoins. This number is cut in half every 210,000 blocks, which is equal to about 4 years. Here’s how it all comes together: because there can only ever be 21 million Bitcoins issued into circulation, new Bitcoins being mined are becoming more scarce. Less new Bitcoins = increased scarcity = increased value.
Bitcoin has literally been programmed to become more valuable over time due to its fixed supply and predictable rate of inflation (halved every 4 years). Hence why not only individuals, but also companies, governments and large financial institutions are beginning to heavily favor Bitcoin as a future reliable store of value, despite its current volatility.
For proof of this statement look no further than Michael Saylor’s Microstrategy, El Salvador’s president Nayib Bukele and one of the world’s largest asset managers – Blackrock. The next Bitcoin halving event is expected to take place in April 2024, as the block reward is reduced from 6.25 BTC to 3.125 BTC. It is the nature of the markets that prices tend to rise in expectation of a bullish event. The upcoming Bitcoin halving, coupled with recent Bitcoin ETF approval and significant inflows of capital into this asset, have recently led to a new all time high price for Bitcoin.