Definition

Every four years, the number of bitcoins awarded to miners is halved until all 21 million bitcoins are virtually mined (likely around the year 2140). The halving mechanism helps maintain a scarcity of bitcoin and makes it a hedge against inflation.

Despite being a digital currency, Bitcoin cannot be created infinitely. Verifiable scarcity is crucial to its value proposition. Two key concepts regarding scarcity are fundamental to the Bitcoin protocol. Firstly, the number of bitcoins will not exceed 21 million. (By the end of 2020, less than 2.5 million bitcoins remained to be “mined” virtually). Secondly, the number of new bitcoins added to the network will be halved every four years. This latter concept is known as halving.

At the beginning of 2020, every 10 minutes, 12.5 new bitcoins were added to the network through virtual “mining”. In May, this number halved to 6.25. In 2024, it will decrease to about 3.125, and this process will continue until all 21 million bitcoins are mined (which is estimated to occur around 2140).

Around April 16, 2024, there will be another Bitcoin halving, as a result of which the mining reward will drop to 3,125 bitcoin per block.

Why is Bitcoin halving important?

By emitting fewer bitcoins during halving, the likelihood of bitcoin’s value increasing (assuming constant demand) is heightened. This stands in stark contrast to fiat currencies, whose value depreciates over time due to inflation – hence, in the 1960s, one could buy a cola for ten cents. Halving is one of the ways the Bitcoin protocol maintains scarcity, and scarcity is one reason why so many people want to hold bitcoins.

How does it work?

Bitcoin is often likened to gold because, like the precious metal, it is a valuable, rare asset that is likely to withstand inflation. However, unlike gold, bitcoin is digital (it can be sent anywhere in the world almost as easily as an email), and its scarcity is known and verifiable by everyone. According to the United States Geological Survey, all the gold ever mined would fit into just over three Olympic-sized swimming pools, but the exact amount of gold still underground cannot be determined. In fact, new gold discoveries are made every year, leading to an unpredictable supply schedule. In contrast, the number of bitcoins is limited, and the schedule of their issuance is known – there will never be more than 21 million, and by the end of 2020, less than 2.5 million remained to be mined.

Like gold, bitcoins are mined, but this happens electronically through a global network of computers competing to verify bitcoin transactions.

Miners are rewarded with bitcoins. At the beginning of 2020, every 10 minutes, 12.5 new bitcoins were distributed. In May, the reward was halved to 6.25 new bitcoins every 10 minutes.

Roughly every four years, the reward for mining bitcoins, also known as the “block reward,” will continue to halve until all 21 million bitcoins are mined around 2140. At this point, Bitcoin miner revenue will come entirely from transaction fees in the network, not directly from earning newly mined bitcoins.

It is impossible for there to be a greater number of bitcoins. This is the opposite situation to fiat currencies, where more money can be printed at the discretion of the government or central bank, leading to inflation.