The most important rule: There may only be a total of 21 million Bitcoins. At this point in time, about 18 million of them have already been created. In order to reduce the speed at which the total amount of available Bitcoins increases, the so-called halving mechanism was also deposited in the Bitcoin code. And this works as follows:
After every 210,000 blocks generated (roughly every four years), the reward that Bitcoin miners receive for processing transactions is halved. This also reduces the speed at which new Bitcoins are put into circulation. In this way, bitcoin uses a "synthetic" form of inflation that halves every four years until the entire stock of bitcoins is in circulation. The relationship between the amount of Bitcoins and the inflation when they are created can be followed at bashco.github.io:
The following halvings have been done so far:
- On 28 November 2012, the reward for generating a new Bitcoin block halved from 50 to 25 Bitcoins.
- On 9 July 2016, it halved again, with miners receiving only 12.5 Bitcoins for generating a new block from that point on.
Even the total number of halvings to be performed is fixed in advance. There will be a total of 32 bitcoin halvings. This calculates a date for the last halving in the period between 2130 and 2140.
How the bitcoin price reacted to the previous halvings
Halving reduces the rate at which new Bitcoins are created, it therefore also reduces the available supply. This can have corresponding implications for investors in https://exnesscom.com/stocks-trading/, as can be seen in other assets where supply is tight while demand is high. The precious metal gold is a good example.
In the past, bitcoin halvings have correlated with massive price increases in bitcoin. The first halving in November 2012 brought an extreme price increase from around USD 11 to almost USD 1,150. The second bitcoin halving occurred in July 2016, with the price standing at around USD 650 at the start of the halving and rising to almost USD 20,000 by 16 December 2017. Although the price then fell from this peak to around USD 3,200 over the course of a year, what remained was a price that was almost 400% higher than before the halving.
Further hedging mechanisms
In the event that halving did not increase demand and the price, miners would have no incentive as the reward for completing transactions would be lower and the value of bitcoin would not be high enough. To prevent this, the Bitcoin network has a process to change the difficulty required to receive mining rewards. If the reward was halved and the value of the bitcoin did not increase, the mining difficulty would be reduced to continue to provide an incentive for miners. This means: the amount of bitcoins released as rewards is still lower, but the difficulty of transaction processing is reduced.