What is Bitcoin Halving and Why It Matters
The Bitcoin halving is approximately a year away. In the past, each halving led to a rise in Bitcoin price. How does it happen? In this article, we will explain what Bitcoin halving is, how Bitcoin mining is related, and its impact on transaction fees.
How Does the Bitcoin Mining Work?
Before moving to Bitcoin halving, it is better to understand how mining has been applied to the Bitcoin blockchain. First of all, the term mining is not used literally but as a reference to how precious metals are dug. In the Bitcoin mechanism, mining refers to a validating process (PoW) that spontaneously generates new Bitcoins and validates transactions on Bitcoin Blockchain. The people who use computers or mining hardware to process and validate the transactions are called miners. It is through this process that a block is created.
Notably, a miner has to use valid transactions to mine a new block, which needs approval by other miners (more than 51%). As a result of that, network security and digital scarcity are created.
What is Bitcoin Halving?
In mining, block rewards are given to miners for processing transactions. The Bitcoin halving refers to reducing this block rewards by half after every 210,000 blocks are mined.
Why does it happen? It is to prevent a high supply of new Bitcoins, which would result in hyperinflation. By reducing the block reward, the new Bitcoins being released into circulation would be cut in half.
Another benefit of the slow release of new bitcoins is that it promotes a more equitable distribution by preventing it from being controlled by early adopters or any central authorities.
The halving takes place after every 210,000 blocks are mined, which is roughly four years. In the past, it happened three times, on 28th Nov 2012, 9th July 2016, and 11th May 2022, respectively. It is predicted that the next halving will be in April 2024.
How Is It Related to the Transaction Fees?
As for the halving of the block rewards, one concern that arose is how to compensate miners’ income with other subsidies, considering the importance of the security that miners have been contributing to Bitcoin network. It is noted that except for the block rewards, the transaction fee also incentivizes miners. As the halving happens roughly every four years, block rewards will reduce to zero in the long term. Thus, the transaction fee would eventually become the sole income for miners.
According to recent market data, transaction fees have risen from 1%-2% of total miner rewards to over 20% during the recent half a year. This is partly due to the BRC-20 innovation (for more information, check out our BRC-20 article here, “Is BRC-20 Worth Investing in?”).
