Bitcoin Halving: What is it?

Have you ever heard of Bitcoin Halving and wondered why it is so important? This helpful crypto tax article has all the answers! Find out more about this process and how it can impact your investments.

The Bitcoin halving is an event that occurs every four years, during which the reward for mining a single Bitcoin is reduced by half.

A “block” contains 1 MB of Bitcoin (BTC) transaction records on the blockchain. In order to add these blocks, miners have to solve a complex mathematical problem with specialized hardware, producing an output that is randomly composed of 64 characters known as a “hash”. Once they finish doing this and successfully lock the block so it cannot be altered, they are rewarded in Bitcoin for their efforts.

When BTC was first created, miners were paid an impressive 50 BTC per block. This enticed early users to mine this new cryptocurrency before it had even taken off! Every 210,000 blocks mined (roughly every 4 years), the amount of fresh Bitcoin being generated is reduced by half until 21 million has been reached.

According to the Bitcoin halving timeline, three successive cuts have taken place since 2012. The first-ever decrease in reward for mining a block was from 50 BTC to 25BTC back in 2012. Subsequently, two more reductions were implemented four years apart – 2016 and 2020 respectively.

Bitcoin’s halving event in 2016 drastically reduced rewards for miners to merely 12.5 BTC per block mined, and as of May 11, 2020 it has dropped even further down to 6.25 new Bitcoins created with each one successfully mined. The next predicted halving will take place no later than 2024, continuing this cycle until approximately 2140; a system designed to control inflation while allowing the currency some stability over time.

It’s all due to the cryptocurrency mining algorithm that is designed to search for new blocks in a 10-minute frequency. When more miners join the network, they contribute additional hashing power which reduces the time it takes to discover blocks. To return back to the original target of ten minutes, mining difficulty is reset every two weeks or so. As Bitcoin has grown immensely over last decade, its average block finding rate never exceeded 9.5 minutes at any point of time; henceforth this novel process helps maintain equilibrium between these two contradictory forces

Bitcoin’s availability is finite, with only 21 million circulating or able to exist. Generation of new Bitcoin will end once the full quantity has been achieved. To ensure that a regulated amount of BTC can be mined per block and make it more scarce over time, Bitcoin halving was introduced – significantly increasing its value in the process.

Although halving Bitcoin logically decreases the incentive to mine, prices skyrocket afterwards – which provides miners with an even greater urge to extract more BTC. This is regardless of their reduced payouts due to the halvings.

Bitcoin miners are encouraged to continue mining as prices rise. On the other hand, miners may lose the incentive to create more Bitcoin if the price of the digital currency does not rise and block rewards are reduced. This is because mining Bitcoin is a time-consuming and expensive operation that necessitates a lot of computer power and electricity.

So, why is the Bitcoin halving important? Well, this event often causes a lot of unrest in the cryptocurrency market. The supply of untouched Bitcoin decreases due to the cycle and its value consequently increases – giving investors a chance to make money!

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Source: Jasper