Analyses
19
Nov
bitcoin halving

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What is Bitcoin halving?

Bitcoin halving is an event in which the supply of new bitcoins drops by 50 percent. The first Bitcoin halving took place in November 2012. Halving is an event programmed into Bitcoin’s code, strongly linked to mining.

The Bitcoin halving has significant implications for the entire crypto market. Halving events primarily affect the Bitcoin miners.

What is Bitcoin halving?

Bitcoin halving is an event in which the supply of new bitcoins drops by 50 percent. It occurs approximately every four years and ensures that the number of bitcoins in circulation never exceeds 21 million. The next Bitcoin halving will be seen in April 2024.

Halving practically means halving Bitcoin block rewards. Block rewards are bitcoins distributed to miners every time a new block is created. When Bitcoin was launched in 2009, miners received as much as 50 bitcoins per block. The block reward has been halved three times since then: 50 BTC -> 25 BTC -> 12.5 BTC -> 6.25 BTC.

Bitcoin’s block reward is now 6.25 bitcoins per block and will be halved to 3.125 bitcoins next. The 2024 halving is Bitcoin’s fourth halving. A total of 32 halving events are seen, after which all 21 million bitcoins have been mined. The last halving will happen around 2140.

The picture below shows the development in the coming years. Bitcoin inflation is made up of block rewards. After the next halving, inflation will decrease to slightly less than one percent.

bitcoin inflation

Bitcoin’s limited supply sets it apart from traditional fiat currencies. Central banks can create fiat currencies without limit, but the supply of Bitcoin will never exceed 21 million. Bitcoin’s monetary policy has a built-in scarcity driven by halving events.

It is essential to understand that halving does not make Bitcoin a deflationary but a disinflationary currency. Fewer and fewer new bitcoins enter the market until the supply stops growing after 21 million bitcoins. However, the supply will not decrease at any point.

When did the first Bitcoin halving happen?

The first Bitcoin halving took place in November 2012. As a result, the block reward was halved from 50 bitcoins to 25 bitcoins. This halving significantly impacted block rewards measured in bitcoins but not in dollars. This is because the price of Bitcoin at the time of the first halving was only $11 per bitcoin.

Bitcoin’s history has seen three halvings: 2012, 2016, and 2020. The table below shows the dates of the halving events and their effects on Bitcoin.

HalvingBlock rewardSupply growth per dayHalving date
Halving 1 50 BTC -> 25 BTC 7200 BTC -> 3600 BTC November 28, 2012
Halving 2 25 BTC -> 12.5 BTC 3600 BTC -> 1800 BTC July 9, 2016
Halving 3 12.5 BTC -> 6.25 BTC 1800 BTC -> 900 BTC May 11, 2020
Halving 4 6.25 BTC -> 3.125 BTC 900 BTC -> 450 BTC April 2024 (estimated)

Each halving happens every 210,000 blocks, which is approximately four years. The time between halvings varies because Bitcoin blocks are not generated exactly every 10 minutes. A block can sometimes be mined in a couple of minutes, but it can also take more than an hour.

The block time is 10 minutes on average over a longer period. It does not decrease even though the mining power of the Bitcoin network increases steadily. This is because the difficulty level of Bitcoin mining is automatically adjusted as the mining power changes. The more mining power there is in the network, the more difficult mining becomes.

The difficulty adjustment ensures that the Bitcoin reserve grows at a predictable rate and halvings occur at the right time.

How does Bitcoin halving happen?

Halving is an event programmed into Bitcoin’s code, strongly linked to mining. Understanding halving requires mastery of Proof of Work and the basics of Bitcoin mining.

Bitcoin uses a consensus algorithm called Proof of Work. A consensus algorithm is a procedure by which network actors form a consensus. In the case of Bitcoin, consensus means that all parties agree on the transaction data to be recorded on the blockchain.

Proof of Work was a popular cryptocurrency consensus algorithm before 2016. In recent years, it has been replaced by Proof of Stake.

As the name suggests, Proof of Work requires creating a proof of work so that the network operator gets the right to create new blockchain blocks. In the case of Bitcoin, these operators are called miners. Miners are purpose-built computers (ASICs) designed just for this task.

The image below shows Bitcoin miners manufactured by Bitmain.

bitmain asic

Miners are the backbone of the Bitcoin network. They use enormous amounts of computing power and energy to solve mathematical equations. Miners receive bitcoins as a reward for the energy they use.

The block reward has two roles: it acts as a financial incentive for miners, in addition to which new bitcoins are created in the form of block rewards. All bitcoins are created through the mining process. At the moment, approximately 93 percent of all bitcoins have already been mined.

We have published a comprehensive beginner’s guide to Bitcoin mining. If you are interested in the topic, check out this article.

Bitcoin halving happens entirely automatically. A function in Bitcoin’s programming code reacts to the number of mined blocks and halves the block rewards. The exact process is repeated for each halving without manual intervention by Bitcoin developers. Bitcoin’s program code, therefore, rolls entirely independently.

Why do halvings happen after 210,000 blocks? Why are there 21 million Bitcoin reserves? Satoshi Nakamoto, who developed Bitcoin, once decided on these parameters. We will probably never know why Satoshi ended up with these numbers.

Do Other Cryptos Have Halvings?

Other Proof of Work-based cryptocurrencies also have their halving events. The most well-known PoW cryptocurrencies are Bitcoin Cash and Litecoin. Bitcoin Cash is a currency forked from Bitcoin in 2017, while Litecoin is based almost entirely on Bitcoin’s code.

Bitcoin Cash has an identical supply mechanism to Bitcoin, and its halvings happen almost simultaneously. The next Bitcoin Cash halving will occur between March and April 2024, i.e., about three weeks before Bitcoin’s halving.

Litecoin has a corresponding halving of block rewards every four years. Since Litecoin entered the market about a year before the first Bitcoin halving, its halvings are seen in the year before the Bitcoin halving. The last Litecoin halving took place in August 2023.

There are also other Proof of Work cryptocurrencies on the market. Some use a halving similar to Bitcoin, and some can reduce their supply in other ways. Most cryptocurrencies currently use Proof of Stake consensus, which has no predetermined halving events.

The impact of the halving on the crypto market

The Bitcoin halving has significant implications for the entire crypto market. Halvings are one of the most talked about events in the cryptocurrency world. They have also historically influenced investor behavior.

Historical development does not guarantee the future, but Bitcoin’s course has made significant movements since the previous halvings.

  • Bitcoin’s price skyrocketed more than 100x in the year following the first halving
  • A huge cryptocurrency boom followed the 2016 halving in 2017
  • After the halving of 2020, a significant bull market was seen in 2021

Many investors firmly believe that Bitcoin’s halving events will continue to trigger a new bull market. Let’s talk about the so-called four-year cycles.

In 2019, the nickname PlanB published a Stock-To-Flow model that predicts Bitcoin’s price development based on halving cycles. The graphic below shows the model’s forecast (brown line) and Bitcoin’s price development. The color codes indicate the time until the next halving event.

bitcoin halving s2f

Although Bitcoin has behaved in a certain way in history, the rate of development may be completely different in the future. Since its early years, Bitcoin has changed tremendously as an investment, and the crypto market has also evolved massively in the past five years.

Three halvings is also a tiny sample, which means a lot of randomness is involved. Below are listed four points for investors to think about:

  1. Bitcoin’s market value is now significantly higher than it was before previous halvings, making it more difficult for the price to rise.
  2. Bitcoin futures, options, ETFs, and other instruments have not been used to this extent.
  3. More than 90 percent of the Bitcoin reserve has been mined, so changes in supply are comparatively minimal.
  4. In recent years, Bitcoin’s exchange rates have been controlled by the activities of central banks and the stock market movements.

There is a lot of evidence that the price of Bitcoin is mainly driven by global liquidity (the balance sheets of major central banks), the strength of the US dollar, and the development of the stock market. The Stock-To-Flow theory, which enjoyed great popularity in previous years, was generally ditched at the end of 2021.

Even if the halving event does not directly affect the price of Bitcoin, it can indirectly control the market by changing investors’ attitudes.

Halflings have been discussed in the media for months, and their impact is speculated on podcasts and blogs. Many believe this will happen since the bull market has followed previous halvings. If enough people put their money in for a price rise, this can become a self-fulfilling prophecy.

The impact of halving on miners

Halving events primarily affect the Bitcoin miners. Miners are part of the Bitcoin ecosystem and experience halving changes right from the first block.

Miners are responsible for maintaining the Bitcoin blockchain and securing the Bitcoin network with their mining power. The more miners Bitcoin has, the harder it is to manipulate the blockchain. Currently, it is practically impossible to manipulate the blockchain.

If a significant number of miners stopped operating, it would be a potential security threat. This is why the discussion about miners’ profitability is relevant. It is also related to halving events, which halve the earnings miners receive from block rewards.

Since block rewards are halved over time, miners need compensation in other ways. At least one of the following must happen in the future:

  1. The price of Bitcoin must increase sufficiently
  2. Transaction fees must increase sufficiently

It is good to remember that miners also receive transaction fees for that block and block rewards.

The price of Bitcoin has risen in previous years to compensate for the drop in block rewards. However, it is clear that the price increases a little less in each cycle than before, and this trend is unlikely to change. The reason is Bitcoin’s ever-growing market value.

Transaction fees are likely to increase in the future. However, there is a risk that costly transaction fees will reduce the use of Bitcoin. Because Bitcoin’s block size is finite, transaction fees cannot grow indefinitely.

Bitcoin halving always leads to consolidation in the mining business. The most profitable companies will continue to profit, but the smaller mining farms are in trouble. Much depends on the price of the electricity used by the extraction farm.

When is Bitcoin halving 2024?

The fourth Bitcoin halving occurred on Saturday, April 20th, 2024, at 00:09 UTC. Bitcoin will halve in 2024 when block number 840,000 is mined on the blockchain. The block reward will decrease from 6.25 to 3.125 bitcoins.

Bitcoin halving in 2024 will be seen in the media more than previous halvings combined. Awareness of the Bitcoin halving events and the subsequent bull market is greater than ever. The discussion will be heated among analysts, investors, and other crypto enthusiasts. Every podcast, blog, and media house following the industry will speculate on the effects of the halving throughout 2024.

Bitcoin’s previous bull markets have followed halving events. Even if the halving 2024 does not act as a bull market trigger this time, Bitcoin may very well get traction from the macroeconomic side.

In 2024, we will probably see central banks move towards a looser monetary policy. Key interest rates will turn down, and global liquidity will increase. As a result, investors’ sentiment will turn increasingly in favor of risk-taking. The change will probably be seen towards the end of 2024. The result would almost certainly be a crypto bull market in 2025, which would not surprise anyone who follows the industry.

The halving immediately affects the miners of the Bitcoin network, who lose 50 percent of the block rewards immediately after the halving. Some mining farms will drop out of the game or merge with more prominent players.

Bitcoin’s halving in 2024 will likely lead to a growing debate about its security, and miners’ profitability will increasingly fade into the background. Help with the problem can also be obtained from a surprising source: Bitcoin’s Ordinals protocol!

Antti Hyppänen

Antti Hyppänen is the founder and editor-in-chief of AboutBitcoin.io. Antti has written articles about cryptos since 2017. He follows the crypto market every day of the year and is responsible for the daily operations of AboutBitcoin. Antti is not a maximalist regarding any cryptocurrency but looks at the industry objectively. Antti’s investment profile is “buy & hold,” i.e., he does not trade or use leverage. His crypto portfolio consists of mainly Bitcoin and Ethereum. Antti also follows macroeconomic events. In addition to cryptos, his interests include gold, silver, and the US stock market.

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