The world's biggest digital currency, Bitcoin, is rooted in a decentralized network called blockchain. Blocks that are chained together contain 1MB of data on Bitcoin transactions. As the number of transactions grows, so does the blockchain. Crypto miners, who maintain the ledger of transactions and verify them, are rewarded for their work with Bitcoin tokens. This reward for mining a block is cut in half around every four years, when a set of 210,000 blocks are mined. This is called Bitcoin halving. It is one of the most significant events in the Bitcoin ecosystem, and of course it also affects the price of Bitcoin.
The aim of Bitcoin halving is to ensure that the amount of Bitcoin that is mined decreases over time, making this digital asset more scarce and therefore more valuable. The lower block reward for mining Bitcoin reduces the revenue that miners can generate from adding a new block of transactions to the blockchain. The price of Bitcoin needs to increase in order to offset the cost of electricity required to power computers that verify the transactions.
How does halving impact Bitcoin's price?
Bitcoin’s price has increased after every Bitcoin halving, although it rarely leads to a sudden price spike, as the move is more or less scheduled, allowing traders and investors to prepare and price in the expected change. Besides, Bitcoin’s price is not only affected by halvings, but depends on other factors as well. Bitcoin miners who think the price increase does not offset their costs might decide to mine other cryptocurrencies. Transaction fees are also becoming a more important revenue for miners.
Halving was written into the cryptocurrency's code by its creator, a mysterious person or a group of persons called Satoshi Nakamoto, in order to control price inflation. The year 2020 marked the third halving since Bitcoin’s creation in 2009. The next Bitcoin halving is due in May 2024.
Rewards will continue to halve until the planned total number of Bitcoin tokens, 21 million have been mined - sometime after 2140. The last Bitcoin halving is predicted to occur in 2040. Bitcoin was designed this way because, unlike fiat currency, digital currencies are not issued by central banks and are not overseen by a central authority. The scarcity is part of what underpins Bitcoin’s value, and supporters of the digital asset see it as a safe haven against conventional currencies and from devaluation. This makes Bitcoin similar to gold, in that the supply of gold is also very limited but relatively predictable, making it an excellent store of value and a useful asset to protect investors against inflation. (And like Bitcoin, gold was often also used for payment in transactions.)