Bitcoin Halvings: A Predictable Reduction in Supply

A Bitcoin halving is a pre-programmed reduction in the number of new coins created with each block. It's written into the protocol and has been since Satoshi Nakamoto published the original code in 2009.

The mechanism serves a specific purpose: it creates a predictable, decelerating supply schedule. The total number of bitcoins that will ever exist is capped at 21 million. By cutting the reward in half at regular intervals, the protocol ensures that roughly 99% of all bitcoins will have been mined by the 2030s.

The first halving occurred on November 28, 2012, when the block reward dropped from 50 BTC to 25 BTC. The price was around $12 on halving day and climbed past $1,000 over the following 12 months. The second halving took place on July 9, 2016, with the reward dropping to 12.5 BTC.

The economics of shrinking supply is a key argument for halvings affecting price. If demand stays constant and supply growth falls by half, the clearing price should rise. However, in practice, demand never stays constant. The stock-to-flow model attempts to quantify this relationship but has been criticized for treating demand as a constant.

The impact of halvings on miners is significant, with their primary revenue source dropping by half overnight. Miners have adapted to these shocks by increasing efficiency and investing in next-generation ASIC hardware. Despite lower rewards, the network hash rate has continued to climb after every halving.