With every 210 000 blocks mined, or approximately every 4 years, the reward given to Bitcoin miners, along with the creation rate of Bitcoins, is cut in half.
These events are known as “halvings”.
The process is hard-coded into the Bitcoin blockchain and as it is open-source, anyone can see the few command lines that determine the halving rules. The initial subsidy for mining a block was set with the Genesis block (the very first block of the chain) at 50 Bitcoins. The first halving (2012) reduced it to 25 BTC.
Halvings happen once every 4 years.
Once 32 halvings occur, the process will stop, and no more Bitcoins will be created. At that point the pre-defined maximum of 21 million coins will be reached.
The fixed number of Bitcoins contrasts with traditional currencies. The system was developed amidst the global crisis of 2007-2008 and was an opposition to the flaws of the current financial system.
Through the halvings, Bitcoin prevents price inflation.
There is no easy way to introduce more supply to the system, a process known as quantitative easing in the conventional financial systems.
Nakamoto never explicitly explained the reasons behind halvings. The system is designed to create more coins at the beginning, which may have been meant as an incentive for people to join the network and start mining new blocks.
The halvings bring into play the basic economic principle of supply and demand. When the supply drops, given the demand remains the same, the price (value) rises. Halvings reduce the creation of new coins by half, while demand typically remains steady.
The less Bitcoins created, the more valuable those in existence are.
The halvings have so far lead to some of the biggest runs of Bitcoin.
But because of the decentralized and semi-anonymous nature of Bitcoin it is difficult to attribute specific things to specific events. For example, given that the events are pre-programmed in the code and everybody knows exactly when they happen, it is not unlikely that they get reflected in the price before the halving.
Furthermore, an increase in the coin value may lead to users holding Bitcoin as a speculative asset rather than using it as a medium of exchange.
Halvings strongly affect the miners, as their reward is drastically reduced.
Mining is a very costly process, so if the revenue is not enough to cover the expenses, miners will be forced out – something that may reduce the computing power of the network significantly. In the end, mining is a business and it is only normal that miners would make some adjustments to their business models as each new halving nears.
Furthermore, there is a backup plan if prices don’t increase as a result of the short supply. This is the process that reduces the mining difficulty, which can be a stimulus for the miners to keep working.
Once all the blocks are mined and all the coins are created, transaction fees will pay miners for keeping the network going and secure. If the blockchain system develops well, the growing number of transactions will make up for the lack of new coins.
Halvings are a new way of introducing money in a financial system.
Bitcoin is an inflationary currency, but unlike any other currency, the inflationary rate decreases, in a predictable and pre-defined manner. In the long run, scarcity is what might make Bitcoin a safe haven against currencies that are vulnerable to devaluation during times of economic crisis.
