Thanks to its meteoric price rise, bitcoin is now a common topic of discussion in households across the planet. Over 100 million people hold it worldwide. Yet, bitcoin does not operate like the government money we are used to – it is a technology breakthrough with a steep learning curve.

A key component of bitcoin is how it is issued or distributed. Central to this process is the bitcoin halving.

Every ten minutes, someone mining bitcoin successfully orders a set of transactions and adds them to the blockchain. They are rewarded with freshly minted bitcoin for spending the energy to do this. 

The amount bitcoin that is rewarded per block remains the same for four years at a time. However, every four years, the amount of bitcoin that a miner receives for successfully solving a block cuts in half – an event known as the “halving.”

A Scheduled Supply Cut

This halving mechanism is integral to Bitcoin’s system of deflationary currency. Imagine that every four years, the amount of new gold that miners are able to pull out of the ground is cut in half. Would the value of the existing gold in the economy go down, or up?

The halving serves a key purpose – it ensures a low, and eventually zero, inflation of the supply of bitcoin. Once all bitcoins have been minted, inflation will cease completely, and whatever bitcoin already exists is all that will be available to use. Even still, the amount of bitcoin in circulation will never “run out,” because even a small amount of bitcoin can be divided infinitely.

Key Halving Dates

When the Bitcoin Network began in 2009, miners received a reward of 50 bitcoins per block. In 2013, the first halving occurred, reducing the block reward to 25 bitcoins. 

The mechanism has continued to operate as designed. Today, miners receive a reward of 6.25 bitcoins per block. The next halving, expected to take place in April 2024, will reduce the reward further to 3.125 bitcoins per block.

This process will continue until all bitcoins have been mined. After approximately 34 halvings, new bitcoin issuance will cease, capping the total number of bitcoins in circulation at slightly less than 21 million. Current estimates place the final halving event in the year 2140.

The Halving’s Significance

Bitcoin halvings are significant for several reasons. Issuing new bitcoins gives miners a key incentive to contribute their computing power to the network. However, these newly minted coins are often sold by miners to cover operational and energy costs that are priced in fiat, which puts constant selling pressure on bitcoin's price.

The halving event reduces this selling pressure by halving the amount of new bitcoin issued. Less efficient miners, who needed to sell more of their block rewards to operate, are cleared out. Historically, this has led to an increase in bitcoin’s exchange rate with the dollar.

Considering the continued information asymmetry between enthusiasts and the general public about these dynamics, many believe the upcoming 2024 halving is not “priced in.”

What Happens After the Final Bitcoin is Mined?

Over 90% of bitcoins have already been mined. As the block reward diminishes with each halving event, miners will increasingly rely on transaction fees as the primary incentive for their work.

Following the final halving in 2140, miners will rely only on transaction fees to compensate them for the energy they spend to mine bitcoin. We have already seen a precursor to this phenomenon. At times when the number of bitcoin transactions is high, miners sometimes earn more from transaction fees than the block reward.

This trend indicates that the bitcoin ecosystem can sustain itself via transaction fees alone, ensuring its viability long after the last bitcoin has been minted.

Understanding the bitcoin halving and its implications for the supply and demand dynamics of the ecosystem is vital for anyone involved in bitcoin.