April 29, 2024, 7:43 am | Read time: 6 minutes

The first Bitcoin halving took place in 2012, the second in 2016, and the third in 2020. Thus, in April 2024, the fourth Bitcoin halving occurred. It was the most significant event in the entire crypto world. But how exactly does it work? And why is it so important?

Nakamoto’s Idea of Bitcoin Halving

The halving is immutably programmed into the Bitcoin code. It’s called a halving because the reward for verifying a transaction block is halved—from 6.25 to 3.125 Bitcoins in April 2024. This reward is received by the so-called miners in the Bitcoin network. With each future halving, another reduction occurs. In 2028, it will decrease from 3.125 to 1.5625 Bitcoins per block, and so on. The miners sell the received Bitcoins into the market, making them available to buyers.

The halving is not tied to a specific date but to the number of verified blocks. The next reward halving always occurs after 210,000 blocks. The Bitcoin network takes about four years to reach this block count. The final halving is expected in 2140. By then, the last of the total 21 million Bitcoins will be mined.

The anonymous inventor of Bitcoin, Satoshi Nakamoto, also commented on the purpose of halving in the cryptocurrency’s concept paper, the so-called White Paper. He writes: “The block reward is halved every 210,000 blocks. That’s approximately every four years. This ensures that the inflation rate asymptotically approaches zero. This is comparable to gold mining, where the rate of new gold discoveries decreases over time. The block reward is defined by a constant in the source code. This constant is reduced by half every 210,000 blocks.”

The Bitcoin Blockchain

The Bitcoin blocks form what is called a chain. Such a blockchain is a chronological chain of transactions, a kind of publicly viewable ledger. Bitcoin is the most important among the many blockchains. These blocks consist of registered digital transactions, each with a timestamp.

Each of these blocks has a hash value that refers to the previously verified block. Thus, none of the blocks can be removed from the chain. Therefore, all transactions ever made on the blockchain are permanently stored. In this way, transactions are considered verified.

Also interesting: How Does the Blockchain Work? Technology Explained Simply

Mutual Benefits of Bitcoin Halving

The network is securely operated through the verification of blocks. Here lies the technological benefit. The rewards, in turn, are the incentive for miners to perform this demanding work. Currently, 6.25 Bitcoins are worth about half a million U.S. dollars. If the reward were too low, it would no longer be profitable for mining companies to operate the network. This inevitably raises the question of how a halving of the reward after the halving affects the network.

It is exactly as one would expect. The mining sector is thoroughly shaken with each halving; if the Bitcoin price does not approximately double in the foreseeable future, many miners would have to give up. Thus, the halving in April 2024 could mean the end for many miners if the Bitcoin price does not quickly rise significantly. This necessity, in turn, stimulates the imagination of many investors who expect precisely that significant price increase due to the scarcity of supply.

Scarcity Creates Value

Following this logic, the halving should actually lead to a strong price increase. This was indeed the case in the short term. However, the price is currently somewhat declining, which can be partly explained by the outflow of money from individual Bitcoin funds in the U.S. Since January, so-called Bitcoin ETFs can be purchased there. Investors do not have to buy and manage cryptos directly, which is easier for many. However, price fluctuations are normal with cryptos.

The price increase after the halving is the desired effect of the deflationary structure planned by Satoshi Nakamoto. And this idea is now becoming clear not only to “Bitcoin maxis” but also increasingly to former Bitcoin critics such as BlackRock’s CEO Larry Fink, who has become a fervent advocate of Bitcoin.

The significance of the halving goes far beyond Bitcoin. Like a massive planet, Bitcoin moves the entire crypto system of “its moons” downward when its value falls—or upward when its value rises. A rising crypto market with falling Bitcoin prices is, at least so far, unthinkable. For this reason alone, the “cryptoverse” cannot be compared to stocks or other asset classes. If Bitcoin is doing well, most crypto projects are doing well. Thus, all participants in the crypto market always root for Bitcoin. Even if they are not invested or find it technologically outdated and even boring. Without a healthy Bitcoin, nothing works in the crypto market.

More on the topic

The Comprehensive Overview Bitcoin Cryptocurrency Explained Simply

Hype or Revolution? How Blockchain Works: A Simple Explanation

Gold for Everyone

The digital gold, as Bitcoin is now also called, increasingly competes with physical gold. It has several decisive advantages. It is decentralized, globally and cross-border available, and transportable. And the crucial point: the existing reserves have no owner, and thus everyone has access. What does that mean?

Bitcoin can be bought, just like gold. The difference lies in the extraction through mining. Gold mines usually belong to someone, such as private companies or even states. Not everyone can simply mine gold there. Bitcoin, on the other hand, can be virtually mined by anyone in the world without asking for permission. In principle, even on one’s own laptop or even on a mobile phone.

However, it requires a high computational and thus energy effort. This arises from a complicated mathematical process. Through this, a number is determined, which is used to calculate the block’s hash value. Miners must vary this number until the hash meets certain requirements. This is the process of “mining,” which leads to the verification of new blocks in the blockchain.

If the electricity cost is higher than the amount of Bitcoins mined, it is not worthwhile. Thus, the price is essentially determined by the effort or work involved in the mining process—proof of work, indeed. This is the name of the consensus mechanism of the Bitcoin blockchain.

Hype Around Bitcoin Continues to Grow

While Bitcoin skeptics argue that the cryptocurrency is backed by nothing and is pure speculation, Bitcoin supporters claim the opposite: the euro and dollar have not been backed by gold for decades. And through excessive money printing, state currencies have lost their connection to economic performance. Bitcoin, on the other hand, is backed by the work required to create it.

Now that even the world’s largest traditional financial institutions, such as BlackRock, can no longer ignore this argument and are launching Bitcoin ETFs themselves, the hype around the crypto pioneer is gaining momentum again. It remains to be seen how the halving will shape Bitcoin’s further journey.

All references and information mentioned in the text do not constitute investment advice or a recommendation to buy or sell securities (§ 85 WpHG).