What, When, and Why is Bitcoin Halving?

The following article is for educational purposes, not investment advice

Bitcoin Halving Image

By Grant Kurz
Consultabit, Founder
Published May 09 2020

Table of Contents

What is Bitcoin Halving?

The Bitcoin halving is a once every 4 year event cutting Bitcoin's supply distribution rate in half.

According to BitcoinHalving.com, the Bitcoin halving is estimated to occur on May 12th, 2020 UTC.

The current Bitcoin supply distribution rate is 12.5 bitcoins per block, alternatively understood as 12.5 bitcoins distributed every 10 minutes on average. Once the Bitcoin halving occurs, the supply rate will decrease to 6.25 bitcoins per block.

On a more technical level, the Bitcoin halving occurs when the block reward is cut in half every 210,000 blocks. Each block is mined on average every 10 minutes from Bitcoin miners, yielding once every 4 years, approximately.

But what are Bitcoin miners, blocks, and the block reward?

To understand miners, blocks, and the block reward, we need to understand the basics of Bitcoin Mining.

The following section is a brief and simplified explanation of Bitcoin mining due to being outside the article's scope. As such, Bitcoin mining pools will be excluded. An-depth article on Bitcoin mining will be provided in the future.

Bitcoin Mining Basics

Bitcoin mining is the execution of mathematical calculations from computer hardware to validate transactions and increase network security for the reward of bitcoins and transaction fees.

Bitcoin mining is responsible for numerous core functions such as distributing new bitcoins, securing Bitcoin's network, and confirming Bitcoin transactions.

Naturally, Bitcoin mining is performed by Bitcoin miners.

Bitcoin miners are computer equipment, or the people owning the computer equipment, connected to the Bitcoin network and mining Bitcoin. Miners compete against one another to be the first to solve a difficult mathematical “puzzle” every 10 minutes on average, where the winner is rewarded bitcoins. In addition to the reward of bitcoins, the winning miner may also receive transaction fees by validating Bitcoin transactions while solving the puzzle.

The miner's solution to the difficult puzzle proving the energy expended from brute-forcing calculations constitutes proof-of-work.

A winning miner's proof-of-work is broadcasted and validated by the rest of the nodes on the network, and the miner receives bitcoins from the newly recorded block. A block contains data from the miner's calculations including confirmed transactions, a timestamp, and additional pieces of technical data.

Each block points to the preceding block, extending all the way to the first block known as the genesis block. The complete chain of blocks is known as the blockchain, a distributed public ledger of every Bitcoin transaction.

Proof-of-work provides Bitcoin network security since nodes trust the longest chain of blocks, where each block requires a significant amount of work. Therefore, untrustworthy miners attempting to falsify transactions would have to perform more work than the honest miners for each block and every subsequent block, thus having to spend more money on Bitcoin mining equipment than a majority of miners on the network.

Each newly discovered block provides a block reward to the winning miner. A block reward is a reward of bitcoins for providing the proof-of-work, thereby increasing network security and confirming transactions.

Which now brings us back to the point of the article!

The Bitcoin halving is when the block reward is cut in half every 210,000 blocks by the network.

When is Bitcoin Halving?

The block reward halves every 210,000 blocks, equating to approximately every 4 years.

So far, Bitcoin has experienced two previous Bitcoin halvings where the upcoming halving will be the third in the cryptocurrency's roughly decade history.

For simplicity, we provide a table of prior and a few upcoming halvings:

Halving Date (≈) Block Block Reward
1 11/28/2012 210,000 25
2 07/09/2016 420,000 12.5
3 05/12/2020 630,000 6.25
4 2024 840,000 3.125

Why is Bitcoin Halving?

Bitcoin's pseudonymous inventor or group of inventors, Satoshi Nakamoto, wrote Bitcoin's white paper, several emails, and numerous forum posts where insights into the question may be found.

Within Bitcoin's white paper, Satoshi compares the distribution of Bitcoin to gold. The creator states the “The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation.” Soon after, stating: “Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.”

As simplified from the above quote, Bitcoin is halving every 4 years to steadily reduce the distribution rate such that Bitcoin becomes a noninflationary system over time. The halvings will continue until Bitcoin's total supply reaches no more than 21 million bitcoins.

The current trajectory for Bitcoin's last year of distribution is estimated to be 2140. Although 120 years away at the time of writing may seem like a lot of time to acquire bitcoins, over 99% of all bitcoins will be mined around 2040. According to blockchain.com, approximately 18 million bitcoins have been mined. Thus, over 85% of all bitcoins to exist are currently possessed. As every Bitcoin halving occurs, bitcoins will continue to become scarcer.

But why 21 million bitcoins and not, for example, 1 billion bitcoins?

Satoshi Nakamoto wrote an email explaining the reasoning for Bitcoin's total supply and distribution schedule as an educated guess for Bitcoin's price to be similar to existing currencies.

Satoshi writes:

My choice for the number of coins and distribution schedule was an educated guess. It was a difficult choice, because once the network is going it's locked in and we're stuck with it. I wanted to pick something that would make prices similar to existing currencies, but without knowing the future, that's very hard. I ended up picking something in the middle. If Bitcoin remains a small niche, it'll be worth less per unit than existing currencies. If you imagine it being used for some fraction of world commerce, then there's only going to be 21 million coins for the whole world, so it would be worth much more per unit. Values are 64-bit integers with 8 decimal places, so 1 coin is represented internally as 100000000. There's plenty of granularity if typical prices become small. For example, if 0.001 is worth 1 Euro, then it might be easier to change where the decimal point is displayed, so if you had 1 Bitcoin it's now displayed as 1000, and 0.001 is displayed as 1

Satoshi chose a total supply and distribution schedule allowing Bitcoin prices either large or small to be expressed as traditional currencies by simply moving the decimal point. Additionally, the choices were an educated guess for the midrange between two scenarios. The first being if the value of Bitcoin becomes as large as a fraction of world commerce. The second being if the value of Bitcoin remains small within a niche.

Perhaps the best reason, however, is ambiguous. Bitcoin's genesis block, which is the first block of Bitcoin's blockchain initiated by Satoshi, contains the following message: The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

The message refers to a newspaper's headline regarding the United Kingdom's bailout for the banks as a result of the Great Recession.

Bitcoin, with no government or central authority managing the cryptocurrency, is unable to print bitcoins at a ruler's behest.

About the Author

Grant Kurz, Founder of Consultabit

Grant Kurz is the Founder of Consultabit, a blockchain consultancy and software development company. Consultabit equips users with tools, education, and guides for the cryptocurrency and blockchain community. Grant believes cryptocurrencies and blockchain will be a defining force in the 4th industrial revolution.