Why is bitcoin halving

Release time：2024-05-21 18:14:51 Source：International Insights news portal

The first Bitcoin 'halving' event in four years is expected to happen next week and will kickstart a new chapter for the world's biggest cryptocurrency and the scale at which it is mined. 

The past few months has seen a meteoric rise in the price of bitcoin, with the introduction of spot price ETFs in the US supercharging gains to fresh record highs above $70,000.

While the price of bitcoin has fallen back slightly from its peak of $73,805.27 in March, investors are primed for the asset's first halving event since May 2020. 

This is Money looks at what bitcoin halving is, why it is happening now and how this could impact its value. 

In a bid to control the supply of new bitcoins, halving occurs when 210,000 blocks are mined, with the reward for successfully mining reduced by 50 per cent

What is bitcoin mining?

Before understanding how halving works it is important to know how new bitcoin enter circulation.

Bitcoin mining is the process in which transactions are made as new bitcoins enter the circulation in a blockchain.

The purpose of mining is to validate transactions to prevent fraud, as well as adding new blocks to the blockchain ledger.

Bitcoin mining involves using a powerful computer to solve complex hash puzzles. The first user - or miner - to solve the puzzle is rewarded with bitcoin.

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What is bitcoin halving? 

In a bid to control the supply of new bitcoin, halving occurs when 210,000 blocks are mined, with the reward for successfully mining reduced by 50 per cent.

This happens every four years or so and helps smooth new supply of bitcoin, which is capped at 21 million coins.

The next halving is expected to take place on 18 April - but could be a few days sooner or later. 

By 2140 it is expected that the overall cap on the number of coins available will be hit. 

Why is it happening?

It is hard to know for sure why bitcoin was set up in this way.

As eToro market analyst Simon Peters points out, bitcoin creator Satoshi Nakamoto keeps a very low profile with his last public statements coming in 2010. 

Many believe Nakamoto may not even exist and the name is a pseudonym used by the original creator - or creators - of bitcoin. 

Peters says 'the most logical theory' is that by gradually reducing the amount of new coins entering circulation 'halving helps increase the value of the network over time'.

He adds: 'This month's halving will see the reward drop from 6.25 to 3.125 bitcoin per block, meaning the annual supply inflation rate will effectively fall from 1.7 per cent to 0.84 per cent.'

How could halving impact the price of bitcoin? 

Bundeep Rangar, chief executive at Fineqia International, told This Is Money that bitcoin halving events have 'historically been associated with significant price increases'. 

READ MORE: What you need to know before buying Bitcoin: Our experts share the essential tips for investing in the cryptocurrency

He explained that the reduction in the rate of new coin creation leads to a decrease in selling pressure on miners.

This can therefore contribute to a supply shortage and drive up prices if demand remains constant or increases.

eToro's Peters adds that many in the crypto community believe that this month's halving could see the price of bitcoin push towards the six-figure mark.

He says: 'The last bitcoin halving took place in May 2020, when the price was around the £7,000 mark, a small fraction of what it is today. 

'With investor interest in bitcoin already reignited by the approval of spot ETFs earlier in the year, many in the crypto community believe this month's halving could fuel even more positive sentiment around bitcoin and push the price towards the $100,000 mark.' 

After this event, when is the next halving likely to be? 

Although it is hard to say when exactly this date will occur, Peters estimates that this will likely take place towards the end of the first quarter of 2028.

Fineqia's Rangar added: 'Given that each block is mined roughly every 10 minutes, and with an average of 144 blocks per day, the next halving should occur approximately four years from the date of the current halving event.'

Bitcoin was trading below $9,000 before the last halving event 

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