There is a lot of talk these days about this event, but some people wonder what is it and what does bitcoin halving mean.
Halving literally means a reduction in half, and indeed, bitcoin halving is actually cutting the reward for miners in half.
However, to better understand what is being halved, and why it is so important, it is necessary to briefly explain how bitcoin mining works.
When Satoshi Nakamoto launched Bitcoin in 2009, there was no BTC yet.
In the beginning, there was only the protocol, published in late 2008, but there was no bitcoin token in circulation.
There wasn’t even a blockchain, whose first block was created and mined on January 3rd, 2009.
Satoshi’s choice was to have the protocol itself create the BTC, giving them as a reward to the miners who were able to mine a block.
Considering that approximately 1 block was expected to be mined every 10 minutes, and since initially Satoshi decided that this reward would be 50 BTC per block, about 7,200 BTC were created every day.
And so by the end of 2009, more than 1.6 million BTC had already been created, less than the 2.6 million expected since the rate at which the blocks were mined at that time was a bit slower.
If this rate had remained constant, bitcoin would never have become a scarce asset, and in fact Satoshi decided that, precisely to make bitcoin a scarce asset over time, the reward would be halved every 210,000 mined blocks.
This is exactly the answer to what does bitcoin halving mean, namely the fact that the Bitcoin protocol indicates that every 210,000 mined blocks the prize for miners is reduced by half.
Since this configuration is native and inserted directly at the code level, it is virtually unchangeable, except by an eventual agreement of the majority of bitcoin users, which in fact has never taken place.
To mine 210,000 blocks at the rate of one block every 10 minutes, it takes about less than 4 years, which means that two halving events have already taken place: one in November 2012, which brought the miners reward to 25 BTC per block mined, and one in July 2016, which brought it to 12.5.
The third halving of Bitcoin
The third halving will take place in May 2020, bringing the reward to 6.25 BTC, while the fourth will inevitably take place after another 210,000 blocks, presumably in the first part of 2024.
This will reduce the creation of new BTC until one day no more will be created.
The objective of this monetary policy is the so-called deflationary nature, i.e. to create a currency whose circulating mass does not continue to increase forever, as it is the case for traditional fiat currencies, but which at some point starts to increase very slowly, until it stops.
For example in 2021, when only 6.25 BTC will be created every 10 minutes or so (900 per day), the inflation of the bitcoin monetary mass will have fallen below 1.8%, beginning to bring this currency closer to the goal of becoming a deflationary currency.
After the third halving, the bitcoin money supply will continue to increase, but very slowly, which will significantly increase its scarcity.
To be precise, in 2020 the Stock to Flow Ratio of bitcoin, which measures the ratio between stocks and production, will become greater than that of silver and in 2021 it will become similar to that of gold.
It is possible that as early as 2022, the bitcoin stock to flow ratio will also exceed that of gold, thus becoming even more scarce on the markets than the precious metal.