What you need to know about Bitcoin halving

Early next week, Bitcoin is about to experience its third-ever halving, a hugely important event that could shift the balance of power within the network. Historically the event, also called the halvening, drove the price of Bitcoin up, especially in the long term. There are also certain dangers associated with this event — though you probably don’t need to worry too much. 

So what is the halving, and what do Bitcoin owners need to know about it? Read on. 

What is it?

Bitcoin’s network is run by miners, users who run special software on powerful, specialized computers, solving an increasingly complex math problem. Every time the math problem is solved, a new “block” in Bitcoin’s blockchain is created and verified by all the other miners. Each block contains the latest batch of transactions on the network. Once a new block is found, the math problem is replaced by a harder math problem, and the cycle begins anew. 

The system ensures that the miners keep running the Bitcoin network by giving them a good incentive to do so: The miner who finds a new block is rewarded with bitcoins. The miner (typically a massive pool of many individual machines put together) has spent a ton of electricity and processing time to find the block, but the reward typically makes up for it. Currently, the reward per block is 12.5 BTC (around $115,000 at writing time).

This system has worked tremendously well in the decade or so that Bitcoin has been running. But there’s a problem: As Bitcoin becomes more popular and its price rises, more and more miners flock in to reap the rewards.

Satoshi Nakamoto, the pseudonymous creator of Bitcoin, anticipated this, so he built in several safety features to keep bitcoins from being mined too fast. One is the increasing difficulty of mining: as the total computing power of miners increases, it gets more and more difficult to solve the math problem that yields a new block. 

Then there’s the halving. Every 210,000 blocks, miner rewards for finding a new block are, well, halved. In 2009, the reward was 50 BTC per block. In 2012, it got cut in half, and in 2016, it was cut in half once again to 12.5 BTC per block. 

Now, on May 11 (the date is probable but not exact as it depends on how fast Bitcoin’s blocks are mined), the halving will cut the reward to 6.25 BTC per block, meaning that miners will get half the money for their efforts. That makes halving a very big deal. 

Bitcoin was designed to only allow for 21 million bitcoins to be created in total, and we’re at 18.3 million now. The halving and the increasing mining difficulty keep the supply neatly in check, ensuring we don’t reach the total too fast (the final bitcoin should be minted around year 2140). 

It’s all quite predictable because the math is embedded into Bitcoin’s software. But the conditions surrounding Bitcoin have changed tremendously. The price of Bitcoin has surged from a few bucks in 2012 to nearly ten thousand dollars in 2020. Mining is now a massive, multi-billion dollar business. There are numerous Bitcoin competitors, more or less ready to take Bitcoin’s place should it somehow falter. 

What do I need to do?

If you own some bitcoins, there’s really nothing you need to do before, during or after the halving. The bitcoins in your wallet or at an exchange will remain just as safe as they were before the halving. Their value in dollar terms likely won’t drastically change overnight — remember, the halving cuts the rewards miners get when discovering new bitcoins, not the value of bitcoins themselves. 

Long-term, however, you might want to keep an eye on Bitcoin price. The TLDR here is that no one can really be sure on what will happen to the price. The best we can do is make an educated guess, and we’ll come back to this in a bit.  

How will the halving affect Bitcoin?

The answer to this is fairly complex. The very short version is that there probably won’t be any major changes to how the Bitcoin network works.

However, this isn’t certain. Everything else being equal, halving will suddenly significantly decrease the profitability of mining. When that happens, miners typically switch to mining other, more profitable cryptocurrencies (different mining hardware isn’t equally good at mining all coins, adding a layer of complexity to the issue). This can potentially make the Bitcoin network less resilient to attacks; if many miners leave at once, it may give a single, large mining pool a bigger influence over the network. It can also cause some instability in transaction processing; fees could go up, and transactions may be processed slower. 

In a worst case scenario, a big miner outflow combined with a possible BTC price drop, could give a malicious actor an opportunity to try to attack and take over the Bitcoin network. The best known of these attacks is a so-called 51% attack, in which a mining entity with 51% of the computing power in the Bitcoin network can rewrite Bitcoin’s history, essentially handing itself bitcoins with fake transactions. This is very unlikely, and it hasn’t ever been done in Bitcoin’s history, but it is possible. And even the increased possibility of this happening could negatively affect Bitcoin’s price. 

What about the price?

The far more likely scenario is that Bitcoin’s network will stabilize fairly soon after the halving, and everything will go on as normal. In that case, the halving should, in theory, have a long-term positive effect on Bitcoin’s price, as it reduces the amount of bitcoins coming into the market. Typically, miners sell a portion of their mining rewards on the market to cover operating costs and buy new equipment. Now, they’ll be receiving, on average, 50% less bitcoins to sell, which should lower Bitcoin selling pressure on the market. 

Some pundits think this effect will result in a massive increase in price, and have given very bold predictions. 

The halvings in 2012 and 2016 did not immediately result in a massive price spike. In 2012, the price fell sharply post-halving, whereas in 2016 it went up before falling back down in a matter of months. However, on a longer time scale, the price of BTC went up significantly on both occasions. After the first halving, the price rose from about $12 in 2012 to about a $1,000 in a year. After the second one, it rose from about $650 to roughly $2,600 in a year (ultimately reaching nearly $20,000 after a few more months). 

You shouldn’t rely on Bitcoin’s past post-halving performance, though. There have only been two halvings so far, which doesn’t provide enough data to make firm conclusions. Furthermore, the starting price point was vastly different in both cases; at writing time, Bitcoin’s price stands at around $9,300, which is many times higher than where it was at previous halvings. You can read more on this topic here and here, but beware: many experts have known to be horribly wrong when predicting Bitcoin’s price. 

All in all, while it is a major event, Bitcoin halving isn’t something regular users should necessarily fear or overly prepare for. We’ve been through two of them already, and the only major effect has been a long-term increase in price. While that’s definitely not guaranteed, it’s something to keep an eye on. 

Disclosure: The author of this text owns, or has recently owned, a number of cryptocurrencies, including BTC and ETH.