The trading price of Bitcoin (BTC) fluctuates considerably. There are several reasons, including the volume of moved BTC (i.e., how many BTC are sold and bought in the last period), how many times the media declared Bitcoin dead (416 as of 10.06.2021, see https://bit.ly/2Pk6XzG), large amounts of BTC sold below the public market price (https://bit.ly/3djKue6), major issues with exchanges (Mt.Gox crashed in 2013, the BTC price crashed as well), media hype, distrust in conventional currencies pushing some to consider BTC as a safe haven similar to gold, nation-wide adoptions (as recently announced by El Salvador https://bit.ly/3x9D8SG) as well as nation-wide bans (which now the case in China https://reut.rs/2Tg1EmD).
One of the technical reasons believed to induce positive price fluctuations (i.e., an increase of the BTC price) is the so-called Bitcoin Halving Effect, the main topic of this blog post.
One must recall that there will be at most 21 Million BTC ever in circulation. This is a hard limit that cannot be overcome by design. The current circulating supply is already approximately 89% of that amount. The circulating supply changes every 10 minutes, that is when new blocks are mined and are injected into the network. As of 2021, every new block rewards exactly 6.25 BTC to the miner, hence increasing the number of Bitcoins in circulation: the miner gets his reward through a special coinbase transaction (that is probably where the popular Coinbase Exchange and associated app have found their inspiration when looking for a name).
However, this specific number of BTC given as reward (6.25) is decreasing with time! That is, the reward given for each new block halves (i.e., divides by two) periodically. Each time 210’000 new blocks have been mined, a new halving happens. At the inception of the Bitcoin network (early January 2009), each reward was worth 50 BTC. The latest halving happened on May 11th, 2020, cutting in two from 12.5 down to the current 6.25.
Why do halving happen? As the total supply of Bitcoin is fixed, the halving ensure that the number of Bitcoins that can be mined with each block decreases, ultimately making Bitcoin a scarcer resource, and consequently a more valuable one. One might believe that upon each halving, miners would be discouraged to spend their computing resources. However, halving typically are correlated with prices surges (also called bull run), hence incentivizing miners to mine more, despite reduced rewards.
There is no clear or explicit explanation for some of the constants used by the Bitcoin model and its halving process. For instance, why there is a fixed total amount of circulating BTC? Speculations suggest that the number of 21 Million closely matches the total number of Satoshi (one hundred millionth of a single Bitcoin, the smallest and indivisible unit of Bitcoin) that can be represented by a 64-bit floating point number, an internal representation of numbers used by modern computer architectures.
And why does it take exactly 210’000 blocks to trigger a new halving? There is no easy explanation, even the main Bitcoin source code lacks any information on the matter (for the interested reader who really wants to dig into this, check https://bit.ly/3xg2zSq, but after a quick chat with the community of the Bitcoin Developers, it seems to be just a number, chosen by the first developer of the source code, aka Satoshi Nakamoto).
The next halving is expected to happen on March 13th, 2024… try to HODL your BTC until then! 😁