Bitcoin: what is halving and what could its effects be?

1. What is halving?

Halving halves the reward miners receive for adding a new block to the Bitcoin blockchain.

Initially, this reward was 50 bitcoins per block. After the first halving in 2012, it dropped to 25 bitcoins per block, then to 12.5 bitcoins in 2016, and to 6.25 bitcoins at the last halving in May 2020. For the 4th halving, which will take place this friday, the reward will drop from 6.25 bitcoins to 3.125 bitcoins.

This mechanism is built into Bitcoin's code to control the issuance of new units and, therefore, its inflation.

2. Why it's important

Halving is crucial for several reasons:

• Inflation control: By reducing the rate at which new Bitcoins are generated (there will be 21 million around 2140), halving helps to control inflation, which is fundamental to preserving Bitcoin's value in the long term.
• Rarity: Halving helps to make Bitcoin rarer, by slowing the rate at which new Bitcoins are created. This rarity is often compared to precious commodities such as gold, and is central to the argument that Bitcoin is a "store of value".
• Economic impact: For miners, halving is a significant event as it directly affects their profitability. However, by potentially increasing the value of Bitcoin in the long term, it may maintain or even increase the economic incentive to mine.

3. What impact could it have on Bitcoin

Potential impacts of halving on Bitcoin include:

• Price variation: Historically, halvings (there have already been three in 2012, 2016 and 2020) have been followed by an increase in Bitcoin prices, although this effect is not immediate and can be influenced by many other factors. Bitcoin has already risen by 65% since the start, and topped $70,000, thanks in part to the approval of Bitcoin Spot ETFs in the US. So will the halving have the same impact as previous times? It's hard to say, and speculation is rife.
• Network security: In the short term, the reduction in block rewards may reduce the incentive to mine, which could theoretically reduce the computing power dedicated to securing the blockchain. However, the increase in the value of Bitcoin may offset this reduction in reward.
• Adoption and perception: Each halving draws attention to Bitcoin, stimulating discussion and potentially adoption by new users and investors.

In summary, halving is an essential mechanism built into Bitcoin's protocol, designed to control inflation and encourage scarcity, with significant implications for the value, security and perception of Bitcoin.