What does halving mean in crypto? Bitcoin halving explained

When it comes to physical resources like water, soil, or even gold, scarcity is a fact of life. In the world of crypto, however, supply limits are intentionally written into the code.

The Bitcoin halving event reduces the reward that miners who verify transactions on the network receive, cutting the number of coins released into the circulating supply by half. By restricting the supply of newly created Bitcoin, the BTC network intentionally creates scarcity, potentially increasing its price. 

This guide explains what halving cryptocurrency isand what investors should expect when the next halving occurs.  

What does halving mean in crypto?

Crypto halvings are artificially created scarcity events embedded in a token’s original network protocol, designed to limit the supply of coins released into circulation.

Bitcoin is a prime example. While the total supply will never exceed 21 million coins, more than 19 million have already been mined. Miners earn rewards, paid in a specific amount of Bitcoin, for verifying blocks of transactions on the network.

The halving event, which occurs approximately every four years, reduces the reward paid to miners by 50%, decreasing the amount of Bitcoin circulating among traders. This limitation ensures Bitcoin remains scarce.

Due to the halving, mining the last Bitcoin is projected to occur more than 100 years from now at the current production rate.

Why does Bitcoin halving occur and how does it affect crypto?

The halving event imposes strict limits on the amount of Bitcoin released through the mining process, significantly affecting the cryptocurrency community in several key ways.

Creating scarcity: how halving controls Bitcoin’s supply

The halving creates scarcity by limiting the amount of Bitcoin released into circulation. Controlling the circulating supply helps balance Bitcoin's availability with demand. It also supports a healthy and productive network of miners who secure the blockchain with their efforts. Miners rely on the scarcity of their mined coins to buoy the price, keeping their operations profitable.

Halving as an inflation control mechanism in crypto

Inflation is measured by monitoring the increase in a currency's supply. The more money released into circulation, the less value each monetary unit carries. This principle applies to cryptocurrency as well. Mining rewards come from newly created Bitcoin, increasing the circulating supply with each new block, which can reduce each coin's rarity and price. The halving controls inflation by restricting the amount of newly created Bitcoin released to miners over time.

The economics behind Bitcoin halving events

Traders often consider a currency's circulating supply and current price to determine its overall valuation. This analysis works the same way for cryptocurrency. When multiplied by the current price per coin or token, a cryptocurrency's total circulating supply equals its total market cap. In 2024, Bitcoin's market cap equaled more than $1 trillion.

How Bitcoin halving impacts BTC’s price

The halving affects Bitcoin's price in several ways. Since the protocol automatically cuts mining rewards in half, the currency's price must rise to keep miners profitable.  However, price increases are not guaranteed. If the price doesn't rise, miners who depend on selling crypto to maintain their operations may struggle to stay afloat or go out of business altogether. In this scenario, the halving creates little more than a tax write-off for this segment of key network participants. 

Miners are crucial to securing the Bitcoin network, and their profitability is essential for maintaining a functioning and safe payment system. The entire network suffers if the price remains stagnant or drops after halving, meaning miners may become unprofitable, potentially leading to a decrease in network security and stability. 

How does Bitcoin halving work?

The Bitcoin halving is a feature coded into the world's first and largest cryptocurrency protocol. It reduces the rewards paid to miners who secure the network by confirming transactions on the blockchain. Each verified block of transactions results in the release of new Bitcoin. 

In 2009, when the Bitcoin blockchain was first introduced to the public, the reward for verifying transactions was 50 Bitcoin (BTC) per block—a hefty sum in today's market. A new halving occurs after a set of 210,000 blocks is verified. Today, the Bitcoin network's block height (the number of mined blocks) exceeds 850,000.

Because halving is part of Bitcoin's decentralized protocol, no individual can change it. It occurs on a predictable schedule based on the number of blocks mined in a given time frame.

The following timeline provides details on each of Bitcoin's past halvings:

• First halving: The first halving occurred in 2012, reducing the mining reward to 25 BTC. At this time, interest in Bitcoin's network was just starting to grow.
• Second halving: The next halving happened in July 2016 and reduced the mining reward to 12.5 BTC. Over the next year and a half, Bitcoin's price skyrocketed from around $500 to over $19,000.
• Third halving: In 2020, the reward halved again to 6.25 BTC. Bitcoin reached an all-time high of over $68,000 before the end of 2022.
• Fourth halving: After the last halving in April 2024, the reward was reduced from 6.25 to 3.125 BTC, leading some economists to predict further price increases soon.

When is the next Bitcoin halving?

Given the current rate of mining activity, the next Bitcoin halving date should happen in April 2028, but the exact date is impossible to determine. Halvings occur on a somewhat predictable schedule but not on specific calendar dates. Instead, the timing depends on mathematical extrapolations that consider current mining activity and the number of transactions on the blockchain.

Currently, each mined block includes an average of 2,000 transactions, with over 140 blocks mined each day. Ultimately, millions of transactions are verified between halving events, which occur after every 210,000 blocks are mined on the Bitcoin network.

As Bitcoin goes mainstream, it’s possible that more blocks will be mined daily, potentially speeding up the timing of halvings. Conversely, a decrease in network activity would lengthen the time between halvings. 

The timing of the next halving event will adjust with blockchain activity levels. However, many traders note the roughly four-year interval between halvings and plan their buy or sell schedules accordingly. The halving countdown continues to draw attention from seasoned traders and new participants alike.

Should you invest in Bitcoin during a halving?

Bitcoin traders highly anticipate the halving event due to its potential impact on market prices. Many see the halving as an ideal entry point, marking a predictable moment in Bitcoin's price cycle that could lead to significant gains. 

However, these gains aren't guaranteed. The time between the halving and any subsequent price increase varies with each event, and prices can even fall immediately after a halving. Historically, buyers have flocked to Bitcoin ahead of the halving, creating potential selling opportunities for savvy traders.

Due to Bitcoin's high volatility, investing in it presents unique challenges for individuals and businesses. Prices can change suddenly, so traders must carefully weigh the risks of crypto investing against the potential rewards.

Ultimately, buying Bitcoin is a personal decision that depends on an individual's investment goals and risk tolerance.

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While there's plenty of time before the next Bitcoin halving, crypto taxes are due each year. Properly accounting for every transaction is crucial to staying compliant with  tax law.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.