Bitcoin Halving Explained – NerdWallet

Once every four years, the reward that miners of Bitcoin (BTC) receive for validating a block of transactions is reduced by half — a procedure known as “halving.” A halving event cuts the rate at which coins are created, often boosting their price, and is intended to maintain Bitcoin’s incentive mechanism for miners and control the coin’s rate of inflation.

Because Bitcoin adds a new block of transactions to the permanent ledger every 10 minutes, about 144 blocks are created each day. When Bitcoin was released in 2009, miners were rewarded 50 BTC for each validated block of transactions, which means about 7,200 BTC were minted each day. At that pace, we would be rapidly approaching Bitcoin’s limit of 21 million BTC. However, Bitcoin included a stipulation in its protocol that the reward for miners would be reduced by half every 210,000 blocks, which works out to about once every four years.

Bitcoin has gone through three halving events, most recently in 2020. The reward for Bitcoin miners is now 6.25 BTC per block. At the current rate, about 900 BTC are released as a mining reward each day. The next halving will occur in 2024, and the mining reward will be reduced to 3.125 BTC per block, or 450 BTC per day.

Bitcoin’s halving schedule has two goals:

1. Delay Bitcoin reaching its cap. Reducing the mining reward every four years extends the life of the incentive mechanism. Estimates have shown that the last Bitcoin won’t be minted until 2140.

2. Prevent Bitcoin price inflation. After each halving event, the amount of new Bitcoin released to the public annually is reduced by half as well. Assuming demand for Bitcoin stays the same, the reduction in the supply of new BTC after each halving period should boost the value of Bitcoin.

Bitcoin was the first digital currency to incorporate blockchain technology, running on a proof-of-work consensus mechanism whereby Bitcoin miners are rewarded for validating transactions. Bitcoin miners compete to solve complex numerical puzzles using computer algorithms. Every 10 minutes or so, a new block on the Bitcoin network is validated, and the miner who solves the puzzle to validate the new block is rewarded with newly minted Bitcoin.

That proof-of-work system and the reward mechanism are vital to preventing fraudulent transactions. But another key component of Bitcoin is its limited supply — only 21 million BTC will ever be released to the public. As of now, over 19 million Bitcoins have been minted.

Halving keeps miners’ incentive alive for longer while also contributing to Bitcoin’s fixed-supply, anti-inflationary ethos.

When Bitcoin reaches its 21 million BTC cap, miners will no longer receive newly minted Bitcoin as a reward. Instead, they’ll get only transaction fees. These fees now account for about 1% to 4% of their total revenue per block.

Concern among Bitcoin users is that once the limit is reached, transaction fees may not be enough incentive for Bitcoin miners to continue working. Without miners validating transactions, network security likely would suffer, and Bitcoin could collapse.

In 2010, Bitcoin creator Satoshi Nakamoto predicted transaction fees would eventually become essential for the Bitcoin network to continue to function: “In a few decades when the reward gets too small, the transaction fee will become the main compensation for [mining] nodes. I’m sure that in 20 years there will either be very large transaction volume or no volume.”

In the past decade, Bitcoin’s exponential increase in value has delayed the discussion about transaction fees; the price tag of over $19,000 per BTC has continued to make mining a prosperous endeavor. Bitcoin investors might be afforded some peace of mind knowing Bitcoin won’t reach its cap during our lifetime.

So why not leave the discussion to the next generation of crypto investors? It may not be that easy.

Dina El Mahdy, a professor of accounting at Morgan State University and the author of “The Economic Effect of Bitcoin Halving Events on the U.S. Capital Market,” said the future of Bitcoin may be decided before its scheduled limit in 2140.

“I don’t think we have to wait 120 years to have an answer,” she said. “Within the next 10 to 15 years, I predict that the market will settle whether Bitcoin benefits investors enough for it to stay mainstream or not.”