When developing the Bitcoin block chain, digital pioneer Satoshi Nakamoto set the maximum number of available coins at 21 million units. The miners can be active as long as they want - they can never produce more than 21,000,000 Bitcoins. Halving takes place every four years when the mining of 210,000 blocks is completed. To keep the decentralized network of the Bitcoin block chain running and to generate coins, the miners need to provide the system with their computing power. In order to balance the costs for power and hardware, the miners are rewarded with Bitcoins for their services in block creation. The reward they receive for successfully completing a new block is also called a Block Reward.
The goal of Bitcoin Halving is to delay the achievement of the maximum number of coins as long as possible. The halving does not mean that the number or value of the available coins is halved, but only that the reward for the dug blocks is halved. In concrete terms, this means that the miners receive 50 percent less bitcoins for transaction verification. Each individual Bitcoin is then even more valuable, because ultimately there is less to get for the same computing capacity. This shortage can cause the Bitcoin price to skyrocket. Although the rewards for mining are halved every four years, the Bitcoin network is experiencing a steady increase in computing power. This is due to the fact that the price of the limited Bitcoin continues to rise and mining remains lucrative.
Crypto-currency expert Michael Thomale explains the mechanism as follows: „Mining is very expensive due to the cost of electricity and the purchase price of the mining hardware, and therefore, of course, after halving their rewards, the miners are no longer willing to give out the Bitcoins for the same price as before halving.“ Since the Bitcoin price is determined by supply and demand, Bitcoin Halving has always led to a huge price increase, „because the newly mined Bitcoins after halving are always more expensive to trade than before“, says Thomale, who is considered the innovative head of London-based crypto service provider Nexus Global.
The halving slows down the supply of Bitcoin and therefore also has the function of protection against inflation. In order to prevent an inflation-induced loss in value, Bitcoin inventor Nakamoto specified when programming the digital currency that the amount of coins distributed daily would be halved each time around 210,000 blocks were solved by the miners. This halving means that the number of Bitcoins in circulation grows at an ever decreasing rate.
The exact date of the event can never be predicted exactly, because the time needed to create new block chains varies of course. On average, the network needs 10 minutes to create a block. In the past, Bitcoin Halving has always had a major impact on the price of the relevant digital currency. At the first halving on November 28, 2012, the reward per block halved fell from 50 to 25 new Bitcoins. Prices rose from 11 US dollars per month before the halving to 12 dollars on the day of the Bitcoin Halving itself. Over the course of the next year, prices continued to rise, reaching exactly 1,038 dollars on November 28, 2013. On July 9, 2016, the point was reached where the second halving was due – from 25 to 12.5 Bitcoins per block. The price of Bitcoin climbed from 576 dollars on June 9, 2016 – that was one month before the halving – to 650 dollars on the halving day. Despite the price turbulence, the Bitcoin price continued to rise in the following year, reaching the sensational value of 2,526 dollars on July 9, 2017.
Immediately before the remuneration for a calculated block was halved, which was expected on 12 May 2020, the value of Bitcoin dropped significantly. After the price had initially exceeded the threshold of 10,000 US dollars, many investors parted with their Bitcoin holdings shortly afterwards. The consequence was a real crash. The lowest value on the weekend of May 9-10 was around 15 percent lower at 8,494 dollars. On 11 May, the price settled at around 8,700 dollars. The fall in the price before the Miner reward was halved also affected other crypto currencies such as Ethereum and trading in futures on Bitcoin.
How will the Miners deal with the halving of their reward? Without significant price gains, it is difficult to continue to operate Bitcoin Mining data centers profitably with practically half the income. The rewards continue to account for the majority of the miners' income. In May, they received daily values between 17 million and 20 million US dollars. Not even one million US dollars of this was accounted for by transaction fees – the rest was fresh Bitcoins for the successful miners.
For Michael Thomale, who has made a name for himself with corporate financing via Initial Coin Offering (ICO), Bitcoin has similar characteristics to gold: „The demand for crypto-currencies like Bitcoin is constantly increasing, and crypto-currencies are particularly popular in times of crisis. The digital gold Bitcoin is far from peaked, and there is a lot going on in the area of block chain technology.“ Fans of Bitcoin are betting that the share price will rise due to the slower growth in supply. Crypto professional Michael Thomale is also watching the price development of the next halving with great interest. On 4 May he posted a confident „This week things are looking up everywhere“ on his Facebook page on behalf of Nexus Global. But already in April 2019, he pointed out that the mass of Bitcoin buyers are taking action at the wrong time. He wrote in his own blog: „It can be observed again and again that especially in the crypto-currency market, the mass of investors buy when prices are just reaching new peaks and are critical when prices are low. For maximum profit, however, it is necessary to trade the other way around.“ This point in time is absolutely given with the price collapse of Bitcoin immediately before the remuneration is halved.