“History doesn’t repeat itself, but it does often rhyme.” – Mark Twain
With another Bitcoin halving on the horizon, investors and cryptocurrency enthusiasts are on lookout for patterns and clues - anything that could shed light on what’s going to unfold. In 2024, we’ll witness another of these momentous events that have, in the past, spurred intense speculation, economic shifts, and reinvigorated discussions on the long-term prospects of Bitcoin.
Table of Contents:
How does a bitcoin halving work?
The history of bitcoin halvings
What happened the last time bitcoin halved?
How the upcoming halving could impact bitcoin’s price?
What is the bitcoin halving?
The Bitcoin halving, often referred to as “the halving”, is a pre-programmed event in the Bitcoin protocol that occurs approximately every four years or after every 210,000 blocks are mined. During this event, the number of new bitcoins created and earned by miners for validating transactions is halved, hence the term “halving”.
When Bitcoin was created by its pseudonymous creator, Satoshi Nakamoto, in 2009, it was designed with a capped supply of 21 million coins. The halving events are built into the protocol to control the rate at which new bitcoins are introduced into circulation, thus ensuring a predictable and diminishing supply over time.
The halving events have significant implications for Bitcoin’s economics. By reducing the rate at which new bitcoins are created, halvings are seen as deflationary events, potentially leading to increased scarcity and, according to economic principles, driving up the price if demand remains constant or increases.
This periodic reduction in the rate of new Bitcoin issuance is one of the key mechanisms that differentiates Bitcoin from fiat currencies, where central banks can adjust the money supply according to economic conditions.
Why does bitcoin halve?
Bitcoin halves as part of its fundamental design to control its supply and ensure its scarcity over time. The halving process is programmed into the Bitcoin protocol to occur approximately every four years or after every 210,000 blocks are mined. There are several reasons why Bitcoin undergoes halving:
- Scarcity: By reducing the rate at which new bitcoins are introduced into circulation, halving events increase the scarcity of Bitcoin. With a fixed supply cap of 21 million bitcoins, halving ensures that the creation of new bitcoins slows down over time, ultimately leading to a situation where no more bitcoins will be mined once the 21 million cap is reached.
- Predictable Monetary Policy: Bitcoin’s halving schedule is transparent and predictable. Miners and investors can anticipate when halving events will occur, which contrasts with the opaque and discretionary monetary policies of fiat currencies controlled by central banks. This predictability can help build confidence in Bitcoin as a store of value.
- Economic Incentives: Halving events have significant economic implications. As the block reward halves, miners receive fewer bitcoins for validating transactions. This reduction in mining rewards can affect miners’ profitability and may lead to changes in mining behavior, potentially affecting the security and stability of the Bitcoin network.
- Price Dynamics: The halving events often attract attention from investors and speculators due to their potential impact on Bitcoin price. Historically, previous halvings have been associated with significant bull runs and price increases in the Bitcoin market. The anticipation of reduced supply and increased scarcity can drive up demand and prices leading up to and following a halving event.
Overall, the halving mechanism is an essential component of Bitcoin’s economic model, ensuring its long-term sustainability, scarcity, and value proposition as a decentralized digital currency.
How does a bitcoin halving work?
Bitcoin miners secure the network by validating transactions and adding them to blocks on the blockchain. As a reward for their efforts, they receive a certain number of bitcoins for each block they mine. When Bitcoin was first created in 2009, miners received 50 bitcoins per block. This reward is halved roughly every four years, or after every 210,000 blocks mined. When the predetermined number of blocks (210,000) is mined, the block reward is automatically halved. So, after the first 210,000 blocks were mined, the reward dropped from 50 bitcoins to 25 bitcoins per block. Then, after the next 210,000 blocks, it halved again to 12.5 bitcoins per block, and so on.
The halving reduces the rate at which new bitcoins are created, decreasing the rate of supply growth. This reduction in supply growth is an essential feature of Bitcoin’s deflationary monetary policy. It is designed to mimic the scarcity of precious metals like gold and ensure that there will only ever be 21 million bitcoins in existence. Historically, Bitcoin halving events have been associated with increased attention from investors and media, as they highlight the protocol’s built-in scarcity. Some market participants anticipate that the reduction in the rate of new supply entering the market will lead to an increase in the Bitcoin price, assuming demand remains constant or continues to grow. Halvings can also impact the economics of Bitcoin mining. With the reduction in block rewards, miners’ revenue decreases unless the price of Bitcoin rises to compensate. This can lead to some miners becoming unprofitable and potentially shutting down their operations, particularly those with higher operating costs.
The history of bitcoin halvings
First Halving (November 28, 2012):
- The first Bitcoin halving occurred approximately four years after Bitcoin’s creation, reducing the block reward from 50 bitcoins to 25 bitcoins per block.
- This event was significant as it marked the first time the rate of new Bitcoin issuance was cut in half, emphasizing Bitcoin’s deflationary nature and its predetermined supply cap.
- Following the halving, Bitcoin experienced significant price appreciation, with its value rising steadily in the months and years that followed.
Second Halving (July 9, 2016):
- The second Bitcoin halving took place roughly four years after the first, decreasing the block reward from 25 bitcoins to 12.5 bitcoins per block.
- Similar to the first halving, anticipation and speculation surrounded this event, with many expecting it to lead to increased Bitcoin prices due to reduced supply growth.
- Following the second halving, Bitcoin saw substantial price gains, reaching new all-time highs in the years that followed, contributing to increased mainstream interest and adoption.
Third Halving (May 11, 2020):
- The most recent Bitcoin halving occurred approximately four years after the second, reducing the block reward from 12.5 bitcoins to 6.25 bitcoins per block.
- As with previous halvings, this event generated significant attention and speculation within the cryptocurrency community and broader financial markets.
- While the immediate price impact was mixed, Bitcoin price surged in the months following the halving, reaching new all-time highs in late 2020 and early 2021.
What happened the last time bitcoin halved?
The last Bitcoin halving occurred on May 11, 2020. During this event, the block reward for miners was reduced from 12.5 bitcoins per block to 6.25 bitcoins per block. Leading up to the halving, there was significant speculation and anticipation in the cryptocurrency community. Many investors and traders speculated that the reduction in the rate of new Bitcoin issuance would lead to an increase in its price due to the decreased supply growth. However, the actual bitcoin price movement around the halving was somewhat mixed. While there was volatility, the price didn’t skyrocket immediately after the event. The halving affected Bitcoin miners directly, as their revenue per block was cut in half. This prompted some miners to evaluate their operations and potentially upgrade their equipment to remain profitable. Some miners with older, less efficient hardware may have become unprofitable and had to shut down their operations.
There were concerns about the impact of the halving on Bitcoin’s network security, particularly regarding the hash rate - the computational power used to mine and secure the network. Some analysts speculated that a significant drop in the hash rate could occur if miners turned off their machines due to reduced profitability. However, the network remained relatively stable, and the hash rate recovered over time. The halving event also garnered significant media attention, which contributed to increased awareness and interest in Bitcoin and cryptocurrencies more broadly. It highlighted Bitcoin’s deflationary monetary policy and its scarcity, which are often cited as reasons for its potential value as a store of value.
Overall, the last Bitcoin halving was a significant event in the cryptocurrency community, influencing market sentiment, miner economics, and network dynamics. While its immediate impact on price was not as dramatic as some had anticipated, it underscored Bitcoin’s unique monetary policy and its role as a decentralized digital asset.
How the upcoming halving could impact bitcoin’s price?
It’s important to note that this will also be the first halving with institutional interest following the approval of spot bitcoin ETFs in January. To put the impact of bitcoin ETFs into perspective, K33 Research noted that “Bitcoin ETPs globally have seen a net 30-day inflow of 83,500 BTC over the past 30 days, equivalent to 3 months of BTC miner rewards at current rates.” Harvey said that he believes the ETFs in the US could “add further stability to the industry as a whole.”
“The halving will still be new to many and a post-halving market is ripe for many deals to be done. The US ETF should add robustness and maturity to the industry with less future volatility,” he continued. Ryze Labs, in a recent market note, said that with the “unprecedented traditional financial influx via Bitcoin ETFs” paired with the halving, “our long-term bullish outlook remains firm.”
What experts think
“This backdrop offers a unique confluence of factors that could either propel Bitcoin to new heights or - who knows - test its volatility in unforeseen ways,” Mikkel March, founder of ARK36, said.
March warned that the price expectations “shouldn’t be based solely on historical patterns of price surges pre- or post-halving, but also on the evolving landscape of cryptocurrency’s integration into traditional finance.”
Harvey believes that the halving could lead to the centralization of mining.
“We are witnessing the industrialisation of mining, but it is worth noting there are still numerous miners globally. As long as this continues, mining - and BTC - will stay decentralized, albeit among fewer players,” he said.
As Blockworks previously reported, some bitcoin miners could see some financial stress due to the decline in the rewards.
“Historically during past halvings, we did see an initial drawdown in hash, but miners can sustain themselves if they find lower power prices and/or have better equipment - with the latter option of course costing more capital,” analysts at BitOoda wrote in a note.
Valkyrie co-founder Steven McClurg previously told Blockworks that the bitcoin ETFs have led to interest in other bitcoin products offered by the asset management firm, including its bitcoin miners ETF, which trades under the ticker WGMI.
The ETF holds miners such as Marathon, CleanSpark, Cipher and Riot as well as stocks like Nvidia.
He explained that Valkyrie’s bitcoin miners ETF is “actively managed because there are going to be miners that don’t survive and there are going to be some that thrive in this environment. And, hopefully, we choose the right ones.”
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