We are entering the 5th Bitcoin era. What is Bitcoin Halving and why is it important?

What is Bitcoin Halving?

Many people still don't understand or misunderstand that Bitcoin's supply is halved, but they don't understand which part is reduced. This is because the Bitcoin protocol still maintains a supply of 21 million. What is reduced is the production rate, specifically, the reward for mining is cut in half.

Bitcoin Halving is when the system reduces the reward for mining Bitcoin by half. This event occurs approximately every 210,000 blocks on the blockchain network, which takes about four years. This is a standard set by Satoshi to curb Bitcoin's inflation rate within the system.

We are entering the 5th era of Bitcoin.

Era 1: In Bitcoin's early days, the mining reward was 50 Bitcoin per block. Back then, few people knew about it, and it was easy to mine, even with a CPU.

Era 2 of Bitcoin, I'm counting after the first Halving on November 28, 2012, which reduced the Bitcoin mining reward to 25 Bitcoin per block.

Era 3 of Bitcoin: After the second Halving on July 9, 2016, the mining reward was reduced to 12.5 Bitcoin per block.

Era 4 of Bitcoin: After the third Halving on May 11, 2020, Bitcoin's reward was reduced to 6.25 Bitcoin per block.

Era 5 will occur in April 2024, estimated to be on the 20th, and the block reward will decrease to 3.125 Bitcoin.

As of March 2024, there are approximately 19.65 million Bitcoins in circulation, with only about 1.35 million remaining to be released through mining rewards.

To understand Bitcoin Halving, you must first understand how Bitcoin works.

The underlying technology of Bitcoin is the blockchain, composed of a network of computers (called Nodes) that run Bitcoin software and act as a database of transaction history. If it stores everything, it's called a Full Node; if it stores only part, it's called a Lite Node.

Nodes are responsible for verifying that transactions comply with the requirements. If they comply, they are accepted; if not, they are rejected. This includes ensuring that transactions have correct verification parameters and do not exceed the specified length. However, this process does not yet confirm the transaction. The transaction still has to wait in the Mempool for block closure through mining.

Bitcoin Mining is closing blocks.

Bitcoin mining is a process that allows anyone to use computers or hardware called ASICs, which are tools with high mathematical computing capabilities, to help secure the Bitcoin network as miners. They verify transactions and solve mathematical puzzles to close blocks. When a block is closed, miners receive mining rewards, including transaction fees.

Bitcoin uses a system called proof-of-work (PoW) to verify transaction data. It is called proof-of-work because solving encrypted equations requires time and energy, serving as proof that actual work has been done. This is the origin of the consensus protocol named proof-of-work (PoW).

The Target hash controls and links data within each block.

The term "mining" is a metaphor, making people visualize the process as similar to gold mining, where real effort is required, not something that simply appears. Closing a block actually means finding the answer to the target hash puzzle set by the Bitcoin network. The target hash consists of the input from the block header, the hash of the previous block, and a nonce. The hash of the previous block is used to calculate the current block's hash to ensure sequence and prevent reordering. This linking of blocks in a chain is where the term Blockchain originates.

What is a Nonce in the Blockchain system?

Nonce stands for "number used only once." It is a randomly generated number used only once because this value will be the answer to the question: when we combine all inputs, which include the data in the block header and the hash of the previous block, along with the nonce, and feed them into a hash function, we should get the target hash specified by the system. Therefore, what miners must do is find the nonce value to achieve that target hash. Since a hash function cannot be reversed or decrypted, the primary task of miners is to randomly guess numbers and test whether they yield the target hash. So, mining is essentially a process of random guessing to find an answer. Thus, a high-performance mining machine is one with a high hashing power, which increases its chances of closing a block.

Difficulty Level of Mining

Bitcoin has a process to adjust mining difficulty to maintain a consistent rate of Bitcoin entering the system. To put it simply: if the system gives an answer of = 100, and asks us to find what X is in 75 + (X)^2, this is a simple problem.

100 = 75 + (X)^2

Assuming X is the nonce, finding the nonce would be very easy. The answer is 5.

If compared to the total value:

100 (Target Hash) = 75 (Block Header + Last block hash) + X (Nonce)^2

The method to increase difficulty in the system is to increase the Target Hash from 100 to 101. Finding X becomes much harder then. If we look at the appearance of a target hash, it looks like this:

00000000000000000000a5ddcb38e46d1f2264f3c611a8c0477f281f42c66f67

To adjust the difficulty, you just add more zeros to the front, which significantly increases the difficulty of finding the correct nonce value for this target.

Impact of Bitcoin halving

Bitcoin was created based on a principle contrary to the current financial system, which drives the economy with inflation. Bitcoin uses a process of halving its production every 210,000 blocks, or approximately every four years. During the fourth era of Bitcoin, about 900 Bitcoins were produced per day. After the Halving, Bitcoin production will decrease to 450 Bitcoins per day.

Currently, production volumes are already insufficient to meet demand. We see the amount of Bitcoin flowing into Spot Bitcoin ETFs and the combined reserves of Bitcoin on various exchanges have decreased to multi-year lows. I don't know where the demand will end, but the production volume will definitely decrease. How much impact will this have on the price?

But it is certainly capable of pushing the price, and by a very high margin. The target should start to be seen by the end of this year. This year's Bitcoin Halving is unlike previous ones; many things have changed. What is evident is that Bitcoin is getting stronger and stronger. Let's keep watching to see how far the price can go.