A halving is an event in the bitcoin calendar which occurs every 210,000 blocks (roughly every 4 years) and is when the mining reward for a block is halved.
The mining reward is given to the miner who successfully adds a new block onto the blockchain. They receive this in addition to the transaction fees for all transactions within the block. However unlike the transaction fees which are outputs of previous transactions, the mining reward bitcoins are newly created and therefore do not have any transaction history. This is the only way new bitcoins come into existence and means there will only ever be 21m bitcoins. To date just over 18m of the total supply has been mined:
Bitcoin is therefore unlike fiat currencies where additional notes can be printed and placed into circulation, and is more similar to gold, since there is only a finite supply. This gives bitcoin its deflationary and scarcity properties.
The original mining reward per block was 50BTC and this was halved to 25BTC on November 28th 2012, and then down to 12.5BTC on July 9th 2016. The next halving is expected to be May 2020.
The previous two halvings saw price fluctuations in the lead up to the event and bull runs shortly after. As such there is much anticipation in the industry, however caution should be exercised since there are a number of factors at play which may impact the bitcoin price and associated transaction costs:
- There may be psychological buy drivers as media attention of a halving increases and the rhetoric focusses on the decreasing number of bitcoins which will be created and therefore available to own. This may lead to an increase in bitcoin price.
- Some smaller miners may be driven out of business following a halving since the mining reward they collect for finding a new block (plus the transaction fees) has decreased and as such may not cover their costs. This could lead to increased miner centralization.
- If many miners go out of business or switch to mining on other protocols, then the hash rate on the network will decrease, this will in turn increase the difficulty and could see a short term increase in block confirmation times (how long between each block). As such, congestion on the network may occur and transaction fees may increase.
There are however a myriad of other factors influencing the bitcoin price, therefore the halving cannot be considered in isolation, and should instead be viewed within the wider context of bitcoin’s adoption, application and technical development.