What happens during the bitcoin halving?

The next bitcoin halving is just around the corner. This event will halve the rewards miners receive for each new block added to the network’s blockchain.

But what exactly does all of this mean? Blockworks breaks down the technical details around what happens during the halving.

The basics of bitcoin

The bitcoin network operates on a decentralized ledger known as a blockchain, which is run by a network of computer nodes. These nodes are designed in a way that records and verifies the validity of each transaction on the network.

More computer nodes often means that the stability and security of the network are higher. According to Bitnode, there are currently 18,454 nodes running on bitcoin today.

Running a node requires the operator to have enough computer storage to download a full record of the network’s blockchain. This record includes every transaction processed since Bitcoin’s creation in January 2009. As the blockchain grows, so does the need for storage. At the time of publication, the bitcoin blockchain size was over 551 gigabytes.

Read more: The next bitcoin halving is coming. Here’s what you need to know

Transactions on the Bitcoin network are grouped into “blocks.”

Miners, who use powerful computers to solve cryptographic challenges, compete to find a specific 64-digit HEXadecimal number, or “hash.” Successfully discovering this hash allows a miner to add a new block to the blockchain, for which they are rewarded with newly minted bitcoins. This process not only secures the network by verifying transactions but also introduces new bitcoins into circulation, adhering to a predefined issuance rate.

What does this have to do with bitcoin halving?

There have been three previous halving events. The first occurred on Nov. 28, 2012, when bitcoin rewards went from 50 bitcoins to 25 bitcoins. The second happened in July 2016, when rewards went from 25 bitcoins to 12.5 bitcoins. The most recent bitcoin halving event occurred in May 2020, when 12.5 bitcoin rewards were reduced to 6.25.

These events are significant because bitcoin has a hard limited supply of 21 million distributable coins, and there is already an estimated circulating supply of over 19 million.

A new halving occurs each time the network mines 210,000 blocks. By design, these events are meant to occur roughly every four years. In practice, however, this has not always been the case.

Bitcoin’s protocol aims for a new block to be mined every 10 minutes. The network adjusts the mining difficulty every 2,016 blocks in an attempt to maintain this pace. Increases in miner computing power can lead to faster block discovery, while decreases can slow it down.

Over the years, these shifts in capacity have led to deviations from the anticipated four-year interval between each halving. This upcoming halving, however, appears to be aligning closely with its scheduled timeline.

Read More: Bitcoin halving expected to hit on 4/20

According to a Flipside Crypto report, the next bitcoin halving event will most likely occur on April 20, 2024.

What does this mean for bitcoin miners?

Some argue that the fewer the rewards, the fewer incentives there may be for bitcoin miners to continue their operations.

“The current hash rate, the current mining difficulty, a miner’s electricity cost and the current bitcoin price — play a tremendous role in determining if bitcoin miners are profitable and can keep operating older ASICs,” Matthew Niemerg, co-founder of layer-1 network Aleph Zero told Blockworks.

Read more: JPMorgan predicts bitcoin mining stock cooldown: CoinDesk

Sanjay Gupta, the strategy lead at Auradine, a blockchain web infrastructure solutions company, shares this sentiment.

“With bitcoin halving, the need for energy-efficient bitcoin, demand response with the grid becomes even more critical. Older, lower efficient miners without rapid energy response will become obsolete,” Gupta said.

Even so, Sukhveer Sanghera, Earth Wallet’s founder and CEO, highlights DeFi solutions on bitcoin’s layer-2 networks as a beacon for new revenue streams and incentives for miners, including MEV.
“Bitcoin’s hardcoded monetary policy ensures continued trust and stability, while layer-2 innovations like social network layer-2 can provide the incentives to complement base layer immutability,” Sanghera said.

The potential for an increase in bitcoin’s value post-halving could also offset these reduced rewards, maintaining mining’s appeal despite the challenges.

Updated Feb. 22, 2024 at 4:41 pm ET: Clarified spelling of blockchain infrastructure solutions company.

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