Understanding Bitcoin Halving: Its Reasons, Schedule and Impact on the Crypto Industry

Guest Author: Will Canny

Bitcoin's status as the "gold" of cryptocurrencies has gradually solidified. One mechanism that ensures Bitcoin's scarcity and value is the Bitcoin halving, which occurs approximately every four years. At first glance, Bitcoin halving might seem to have a negative impact on the price of Bitcoin. However, the reality is not entirely so. Bitcoin halving is a double-edged sword for people with different backgrounds. This article introduces what Bitcoin halving is, while also addressing the most pressing concerns of crypto investors today.

What Is Bitcoin Halving?

Bitcoin has a total supply limit of 21 million. Its underlying code dictates that only 21 million Bitcoins will ever exist. This limited supply ensures Bitcoin's economic scarcity, supporting its value system.

Bitcoin is obtained through mining, with the existing 21 million bitcoins expected to be mined by 2140. In other words, the last new Bitcoin is expected to be produced by 2140, with all remaining bitcoins to be mined before this time. Currently, miners have excavated nearly 90% of the total Bitcoin supply, mining an average of about 900 bitcoins daily.

To maintain the issuance rate and increase scarcity, the number of Bitcoins issued in each block is periodically reduced. This process of reducing Bitcoin issuance is known as Bitcoin halving.

After a predetermined block height (used to denote the number of a specific block), the number of bitcoins issued in each block is reduced to half of the previous amount. A new halving occurs every 210,000 blocks, or about every four years.

The most recent halving (in 2020) reduced the number of bitcoins issued per block from 12.5 to 6.25. This means miners receive a reward of 6.25 bitcoins per block mined, instead of the previous reward of 12.5.

Why Is Bitcoin Halving Important?

Bitcoin halving has significant implications in terms of economics and sustainability.

In terms of economics, halving creates scarcity for Bitcoin, making it more valuable as "the rarer, the dearer." With fluctuating demand, Bitcoin halving reduces the speed of Bitcoin supply. Over the years, demand for Bitcoin has continuously grown while the supply rate has consistently declined.

In summary, this mechanism solidifies Bitcoin's status as a store of value. The reduction in supply speed, combined with growing demand, ensures that Bitcoin's value increases over time. Given market sentiment and the desire for scarce goods, the impact of halving on Bitcoin's value goes beyond supply-and-demand economics.

It’s currently estimated that around 4 million bitcoins have been permanently lost, due to forgotten wallet information, lost hard drives or the deaths of their owners. Most of these bitcoins are irretrievable. Considering the rate at which bitcoins are permanently lost, Bitcoin is a deflationary currency, and halving further increases this scarcity.

From a sustainability perspective, Bitcoin mining incentivizes miners to validate blocks and protect the Bitcoin network. Miners ensure the blockchain is safe from malicious attacks. As long as Bitcoin issuance continues, miners will be attracted to participate, thereby securing the Bitcoin blockchain.

Halving maintains supply and sustains mining. Halving, by creating scarcity, drives up value and slows down the rate of Bitcoin issuance, attracting more miners to protect the blockchain for longer periods.

Bitcoin Halving Chart

The above chart shows the changes in tokenomics and miner rewards caused by Bitcoin halving. With each halving, block rewards continue to decrease as the supply gradually slows.

It’s estimated that the next Bitcoin halving will occur on May 4, 2024, at block height 840,000. After that time, the current Bitcoin block reward of 6.25 will be reduced to 3.125.

The previous Bitcoin halving occurred on May 11, 2020, at block height 630,000, after which time the Bitcoin block reward was reduced from 12.5 to 6.25 Bitcoins.

Bitcoin Halving Dates

The Bitcoin halving algorithm was confirmed and developed in the currency’s original version Bitcoin’s white paper explains why the issuance of Bitcoin continually decreases, as well as the timetable for halving events.

Four years after the creation of Bitcoin's "genesis block," and after more than 10 million bitcoins had been mined (with 210,000 blocks), the first halving occurred on November 28, 2012, reducing the mining reward from 50 bitcoins per block to 25.

Following is a table of Bitcoin halving dates:

Impact of Bitcoin Halving on Bitcoin’s Price

To different people, halving has its pros and cons, thus acting as a double-edged sword.

For investors, halving means that the frequency of new Bitcoin production decreases, and miners are less inclined to sell their bitcoins. Historical data shows that this anticipated scarcity positively affects investor psychology. Investors expect the value of Bitcoin to rise, potentially leading to more buying activity.

Past halving events have produced positive effects, though the impact of halving on Bitcoin's price can vary with market conditions.

Before the 2020 halving, due to investor behavior and subsequent speculation, the price of Bitcoin rose by about 40%. After the halving, the value of Bitcoin tripled from its previous historic high, reaching a new peak of $67,000.

For miners, halving ultimately means a reduction in rewards. Establishing and maintaining a Bitcoin mining facility is an expensive endeavor, and miners expect block rewards to at least cover these expenses.

How Reduced Rewards Affect Miners’ Expenses

When rewards are halved, miners' income is reduced by half. Considering the current value and the cost of operating a Bitcoin mining farm, many miners might shut down their mining if the calculated mining revenue cannot sustain their setups.

As miners cease activities, the mining hash rate (which refers to the total computational power used to mine and process transactions on a proof of work blockchain like Bitcoin) is expected to decrease, which in turn could slow down the Bitcoin network and lead to longer transaction times. If the price of Bitcoin continues to rise, and miners deem it profitable to operate, the hash rate may return to its previous level.

According to a research report published by JPMorgan in mid July, since the next halving event is expected to arrive in the second quarter of 2024, Bitcoin’s hash rate continues to hit all-time highs, escalating competition among miners.

The article’s team, led by analyst Nikolaos Panigirtzoglou, wrote, "Although Bitcoin halving is considered to have a positive impact on the price of Bitcoin, as historically production cost has acted as a floor, it poses a challenge for Bitcoin miners."

Financial Market Predictions for the Next Bitcoin Halving

JPMorgan noted in its report that the next Bitcoin halving event is a stress test for miners, because miners' income will decrease as the cost of producing Bitcoin increases. The article states that miners with lower electricity costs will have an easier time surviving, while miners with higher electricity costs may find themselves in a difficult situation after the halving.

It’s estimated that a $0.01 change in electricity cost per kilowatt-hour (kWh) could lead to a $4,300 hike in the cost of producing Bitcoin, effectively increasing the production cost to $8,600 and thus leaving high-cost miners more vulnerable.

The report also points out that a sharp increase in hash rate means intensified competition among Bitcoin miners, with more mining equipment being deployed.

However, the report adds that, after the halving event, "for the hash rate to continue rising at the same rate, the price of Bitcoin needs to continue to rise above its production cost, or transaction fees need to increase significantly to offset the reduction in issuance rewards, which is unlikely."

Bitcoin Halving: Market Sentiment

Overall, the market remains optimistic about the large Bitcoin mining market. According to a research report by Bernstein, publicly listed Bitcoin (BTC) mining stocks in the United States, which suffered heavy losses in the 2022 cryptocurrency turmoil, have more than doubled this year.

This recovery is mainly being driven by two factors. First, improved market sentiment led to a strong rise in Bitcoin prices, due to investing institutions like BlackRock and Fidelity filing for exchange-traded funds (ETFs). Secondly, some Bitcoin miners are leveraging opportunities in the high-performance computing and AI fields as a "revenue diversification strategy."

The report cited above further states: "This is a unique survival battle, where only top miners with low costs and conservative debt conditions can survive when Bitcoin prices exceed production costs, consolidate capacity and market share, and achieve extraordinary profits." It states that miners with high debt and weaker positions cannot survive, and may "go bankrupt during the cryptocurrency winter," citing the recent bankruptcy case of Core Scientific (CORZQ).

Currently, the first round of consolidation has been completed, and surviving miners are now increasing capacity to prepare for the upcoming Bitcoin halving.

What Happens When All Bitcoins Are Mined?

You may wonder how miners on the Bitcoin network will be compensated for protecting Bitcoin’s blockchain after its supply is completely mined by 2140. 

When all bitcoins have been mined, miners' incentives will be maintained through Bitcoin blockchain transaction fees paid by users. This shift means that instead of earning new bitcoins as a reward for mining, miners will rely on transaction fees as their main source of income.

This transition is anticipated to ensure the continued operation and security of the Bitcoin network. Even after the last Bitcoin is mined, the network will require miners to process transactions and secure the blockchain. The expectation is that transaction fees will become sufficiently rewarding to incentivize miners to maintain their operations.

This model suggests a future where the Bitcoin network continues to function and remain secure, despite the lack of new bitcoins to be mined. This dynamic aligns with Bitcoin's design as a deflationary currency, one whose total supply is capped at the 21 million limit.

The evolution of the Bitcoin network to rely entirely on transaction fees is a critical aspect of its economic model. It ensures that as Bitcoin becomes more scarce and potentially more valuable, the network can sustain itself without the need for new bitcoins to enter circulation.

The reliance on transaction fees also means that the dynamics of the Bitcoin network could change. If transaction fees become the primary incentive for miners, there may be implications for transaction costs and network congestion. However, developments such as the Lightning Network and other scaling solutions are aimed at addressing these potential issues, ensuring that Bitcoin can continue to serve as a viable digital currency and store of value in the long term.

In summary, the completion of Bitcoin mining won’t spell the end of the Bitcoin network. Instead, it will mark a transition to a new phase of operation, whereby transaction fees play a central role in ensuring the network's security and functionality. This transition is an integral part of Bitcoin's design, reflecting its sustainable and forward-thinking approach to digital currency.

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