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Bitcoin is produced by mining – a computational process where transactions are validated and collected in blocks. The miners behind this procedure are paid with Bitcoins as a reward, the amount of which changes over time.
Halving is when the mining reward and the rate of releasing new Bitcoins into circulation are cut in half.
Its purpose is to lower the available amount of Bitcoins – a process that will continue until all are mined.
Halving happens every time 210,000 blocks are mined, or roughly around 4 years.
The first halving started at 50 Bitcoins. The 2020 one slashed the mining reward to 6.25 BTC. In 2024, the reward will drop to 3.125 BTC.
Bitcoin’s value is dependent on its scarcity. Each halving reduces the rate of supply, thus lowering the available amount of new Bitcoins in circulation. It also affects demand and the rate of inflation.
Over time, the impact of each halving diminishes. When all 21 million bitcoins are mined (~2140), the block reward will be zero.
Network users will then have to pay miners fees as an incentive to continue running the network.
Hint: Think about scarcity and its importance for the price of Bitcoin.