Home Stock & Shares Bitcoin Is ‘Halving’ But What Does That Mean And Why Is It Important?

Bitcoin Is ‘Halving’ But What Does That Mean And Why Is It Important?

by Paul
Bitcoin

Bitcoin, the world’s original and still biggest cryptocurrency, has just gone through a major adjustment called ‘halving’, that takes place once every four years. Halving is a mechanism built into Bitcoin’s underlying blockchain technology and considered crucial to the cryptocurrency’s long-term sustainability. But what does halving actually involve and why is it so significant?

Bitcoin’s smooth functioning is reliant on work carried out by specialist hardware and software that is run by ‘miners’. Bitcoin miners dedicate computing power to solving the mathematical problems the cryptography that secures the cryptocurrency is based on. In return, they are rewarded with newly ‘mined’ Bitcoin units.

Blocks are ‘unlocked’ my miners when the cryptography problem is solved, which verifies and locks in transactions made elsewhere on the blockchain. Yesterday’s ‘halving’ adjustment refers to the reward offered to miners being cut in half. Unlocking a new Bitcoin block now offers a reward of just 6.25 Bitcoin, compared to the 12.5 in place until the end of the weekend.

The halving mechanism was built into the Bitcoin blockchain by the cryptocurrency’s creator, who went by the pseudonym of Satoshi Nakamoto. Its role is to prevent, or tightly control, inflation. Yesterday’s halving is the third Bitcoin has gone through since being created in 2009, with the previous two adjustments taking place in November 2012 and then in July 2016.

The next is currently on track to take place in May 2024 but will be influenced by the pace of Bitcoin mining between now and then. Halving occurs every 210,000 blocks, until new Bitcoin blocks are exhausted. The cryptocurrency was created with a maximum number of 21 million Bitcoin to ever exist. In around a decade, all 21 million will be in circulation.

Cryptocurrencies like Bitcoin are created with a finite cap on their eventual number because they run on decentralised technology and have no central bank or other organisation to regulate supply. Supports say this is what makes them a safe haven against central bank debasement of fiat currencies through money printing.

Bitcoin’s value plunged in March alongside more traditional financial markets as investors took fright as the full extent of the Covid-19 pandemic became clear. However, it has since recovered and is 20% up for the year. That is in large part due to worries over the extent of the money printing that central banks around the world have embarked upon to pay for the rescue of lockdown-hit economies. Many expect that to lead to either higher levels of inflation or stagflation, when currency values drop without the prices of goods and services increasing, in coming years.

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One concern around this week’s halving is that mining Bitcoin is now less attractive to miners, which could slow down the rate at which Bitcoin transactions are verified. Stephen Innes from AXI Corp, the forex exchange and trading platform, commented for the BBC:

“The incentive is less for miners now to mine Bitcoin. Miners will probably switch to more profitable cryptocurrencies.”

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