Sometime in May 2020, Bitcoin miners will see their profits suddenly cut in half. Called "the halving," the event is not an accident but a function of the software supporting the world’s most popular cryptocurrency. The halving is meant to maintain the integrity of Bitcoin as it matures and inches toward achieving its ultimate supply limit.

Bitcoin has already seen two halvings, once in 2012, when Bitcoin was still a geek fad, and again in 2016, before the rising interest in cryptocurrencies and digital tokens caused a surge in the price of Bitcoin. This time around, things are much different. Bitcoin is worth around 20 times its value at the previous halving, has a market cap of around $130 billion, and large companies have built profitable businesses around mining the cryptocurrency. The next halving will certainly have huge repercussions in the mining industry and the Bitcoin community.

Here’s what you need to know as the next halving draws close.

What is mining?

Bitcoin was the first payment technology that enabled the transfer of money without the need for centralized brokers such as banks and payment services. To prevent fraud and ensure the integrity of the network, the creator(s) of Bitcoin introduced blockchain, a decentralized ledger where Bitcoin transactions are stored, and Bitcoin mining, a mechanism that makes sure only valid transactions are registered on the blockchain.

Around every ten minutes, the blockchain stores a new block that contains the latest confirmed Bitcoin transactions. But before the block is added, computers called "miners" must solve complicated mathematical equations that confirm the transactions and prevent bitcoins from being spent more than once.

Bitcoin was also designed to have a limited amount of 21 million BTC in circulation. However, not all of those coins are in existence yet. When a new block is confirmed and added to the blockchain, a fixed amount of new bitcoins are minted, which go to the miner that solved the puzzle first receives as compensation for the resources it contributed to the Bitcoin network. The process is analogous to gold miners spending resources to add gold to circulation (read more: What happens when all the bitcoins are mined?).

The mechanism of compensation has created a competition, where miners throw more and more computing resources into Bitcoin mining to solve the puzzles faster than others and receive the valuable rewards.

What is halving?

At the time of Bitcoin’s creation, every new block came with a 50 BTC reward. However, the software has been designed to divide the reward by two at every 210,000 block, which is roughly every four years. The gradual reduction of mining rewards is meant to prevent inflation as more blocks are created, and to control the supply of bitcoins.

The first milestone was reached in November 2012, when one bitcoin was worth $12.25, after which the reward was reduced from 50 BTC ($612.50) to 25 BTC ($306.25). The next halving occurred in July 2016, when the 410,000th block was mined, reducing the reward to 12.5 BTC. At $660 per BTC, the mining reward suddenly dropped from $16,500 to $8,250. At current rates (approx. $7,600 per BTC), every new block of bitcoins is worth around $95,000.

When the next halving occurs in 2020, the Bitcoin mining reward will be reduced to 6.125 BTC. Given bitcoin’s constantly fluctuating price, it’s anyone’s guess what the mining reward will be worth then.

The effects of halving

The main impact of halving is on the mining industry. Mining companies spend money on hardware and electricity to perform mining operations. By some accounts, miners spend up to 60 percent of their revenue on electricity costs. The sudden drop of reward might make mining no longer profitable for some companies, especially those that are running older hardware.

As a result, we can expect some miners to shut down. However, when the number of miners drops, so does the competition, which in turn reduces the costs of mining bitcoins and encourages some miners to return. After a while the market stabilizes itself again. Also, historical data shows that after every halving, bitcoin’s price has gradually increased and reached a peak sometime in the year that follows. An increase in the price of bitcoin will again make mining profitable for the miners that had to exit after the halving.

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Figure 1: from Bitcoinist (http://bitcoinist.com/bitcoin-halving-2020-what-will-the-price-of-bitcoin-be/)

According to Coindesk, Bitcoin lost 20% of its mining power after the first halving, but regained its pre-halving mining power less than six months later. Whether the same trend will repeat itself after the 2020 halving remains to be seen.

When the last bitcoin is mined

Eventually, when block no. 6,930,000 is mined, all 21 million bitcoins will be in existence and the final halving will occur. After that, new blocks will no longer generate new bitcoins. At that point, regardless of the price of bitcoin, mining new blocks will no longer be a profitable endeavor. What will happen to the miners then?

There are two main reasons for miners to continue supporting bitcoin payments when mining rewards become zero. Aside from the block rewards, miners also collect transaction fees. Depending on network conditions and transaction volumes, transactions fees can total hundreds of thousands of bitcoins every day. By the time bitcoin maxes out its supply, transaction fees might be profitable enough to keep miners in the Bitcoin network.

Another possibility is the introduction of "proof of stake," a consensus technique that will replace the current costly and electricity-hungry mining mechanism. PoS will enable more Bitcoin holders to support transactions without incurring heavy costs. Work on PoS is already under way.

But there’s still a lot of time before the last bitcoin is mined, because unless the Bitcoin protocol undergoes some fundamental change, it won’t happen before 2140. Who knows what Bitcoin and the cryptocurrency landscape will look like then?