Halving is an event that reduces the rewards received by miners by half. This concept specifically refers to Bitcoin, although it can apply to other cryptocurrencies that use Proof-of-Work consensus, such as Litecoin.
How does it work?
Halving controls the inflation of a cryptocurrency by limiting the number of new units brought to the market. This mechanism ensures asset stability and encourages miners to continue their work despite a reduced reward pool.
Halving can impact an asset's price because the reward reduction can lead to a decrease in market supply. If demand remains constant and supply is reduced, prices may increase since fewer assets are distributed.
However, it is essential to point out that halving does not guarantee an increase in an asset's price. The price is determined by demand, supply, and ongoing economic and political events.
Correlation between halving and mining
Halving undoubtedly affects the mining process of a cryptocurrency.
Reducing the reward pool can decrease miners' willingness to participate in the process, as the profitability of participation drops. This could lead to a significant reduction in the network's computing power, which could further affect reduced network security.
Reducing the reward can also lead to increased mining costs, as the process becomes more complex by requiring more computing power and electricity.
The halving policy was incorporated directly into Bitcoin's mining algorithm.
The initial reward for mining one block was 50 BTC. The reward was reduced to 25 BTC after the first halving in 2012.
BTC's halving occurs every 210,000 new blocks, which is about every four years (reducing the prize pool to 12.5 BTC in 2016 and then 6.25 BTC in 2020), with the next happening in 2024.
What happens when there are no more BTC left to mine?
This situation will occur in 2140 when all 21,000,000 BTC will be mined.
At this point, halving will be terminated, but miners will still have the opportunity to validate and confirm new transactions on the blockchain. That's because the value of transaction fees paid to miners is expected to rise. After all, a higher transaction volume will be attached, and bitcoins will have a greater nominal market value.
Halving is a process in which the reward for mining a cryptocurrency is cut in half. At the same time, it reduces the asset’s supply in the market. Halving can affect the price, mining process, and security.