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The bitcoin halving gives the protocol its fundamental deflationary economics, has broad economic impact that is difficult to define, and occurs approximately every four years until the day the last bitcoin is mind.
It is, perhaps, the most fundamental, mysterious, and foreboding event in bitcoin, all wrapped into one, piquing the interest (and, sometimes, fear) of every bitcoin enthusiast.
The following information seeks to, at least partially, demystify the halving and allow potential bitcoin investors to understand key concepts such as market cycles, block rewards, and bitcoin supply dynamics.
A Quick Recap On How Bitcoin Works
To understand the halving, it’s beneficial to first cover how the bitcoin blockchain functions.
When a user submits a bitcoin transaction, it must be verified and recorded on the blockchain. Once initiated, the transaction sits in a pool, waiting to be selected by a miner and included in a block. A block is just a digital file for recording transactions.
Miners pick submitted transactions to put into their block and race to add this block to the blockchain. Miners must solve a complex mathematical puzzle to link their block to the others. This sounds complicated, but it’s essentially just a brute-force guessing game. Miners try to discover the correct hash (a string of characters) by simple trial and error to solve the puzzle. Therefore, the miner with the most computational power wins the race. This type of system is called a proof-of-work consensus mechanism.
A consensus mechanism is a system that allows various network participants to agree on the state of the ledger. In the case of bitcoin, the proof-of-work consensus mechanism determines who has the privilege of adding a block to the blockchain. This right is given to the miner who discovers the correct hash first.
Once a miner finds the hash, they broadcast their solution to the rest of the network. The other nodes verify that this is, in fact, the correct hash. If everything is verified, the block is added and the winning miner is rewarded newly mined bitcoin plus the transaction fees.
New bitcoin can only be created by the block reward given to miners. This is where the halving comes in.
The Halving
The halving is a rule designed into the mechanism that rewards miners. It requires that the amount of bitcoin distributed to the winning miner be cut in half every 210,000 blocks. Since bitcoin blocks are generated approximately every 10 minutes, the halving occurs about every four years.
This event, the reduction of the block reward, is a significant milestone in bitcoin economics. This ever-diminishing reward, being the sole mechanism for creating new bitcoin, ensures that the amount of new bitcoin entering the market decreases over each four-year cycle, resulting in a planned, consistent lowering of the digital currency’s inflation rate. Hence, bitcoin is described as deflationary, which is in stark contrast to traditional fiat currencies.
The halving does not go on forever. Although the block reward could be cut in half continuously to infinitesimal small numbers, the creator of bitcoin actually put a hard limit on the supply so that only 21 million bitcoin would ever be created.
Because of this, given that the publishing year of this article is 2024, we can expect 28 more BTC halvings, with the last one estimated for the 2130s, when the last bitcoin is mined. After the last halving, miners will only receive transaction fees as a reward for adding a new block.
Bitcoin’s deflationary economic model and hard supply cap are some of its most talked-about features. These aspects endow bitcoin with absolute scarcity, a quality that many find attractive and that underpins its role as a store of value.
The halving, in addition to these features, also has broader economic implications.
Impact Of The Halving
Due to the halving restricting the supply of bitcoin without affecting the demand for it, many see the halving as a catalyst for upward price movement. This is based on simple supply and demand theory, which states that if demand remains stable and supply goes down, then the price must increase.
The reality of bitcoin’s price movement is more complicated. Although the supply of new bitcoin being put into the market is lowered, the amount the halving affects the supply is not obviously significant enough to directly affect the price given other supply dynamics, such as the number of sellers versus hodlers in the market.
That said, in the early days of bitcoin, when the market was much smaller, an event like the halving could have had a large effect on bitcoin’s price. Historically, the year following the halving has seen bitcoin peak at multiple times the amount it was trading at during the halving.
The first halving occurred on November 28, 2012, and reduced the block reward to 25 BTC from 50 BTC.
- Price at time of halving: $13
- Following year’s peak: $1,152
The second halving occurred on July 16, 2016, and reduced the block reward to 12.5 BTC.
- Price at time of halving: $664
- Following year’s peak: $17,760
The third halving occurred on May 11, 2020, and reduced the block reward to 6.25 BTC.
- Price at time of halving: $9,734
- Following year’s peak: $67,549
The fourth halving occurred on April 19, 2024, reducing the block reward to currently 3.125 BTC, and despite bitcoin breaking its previous all-time high, the effect has yet to be fully seen at the time of this writing.
Although the original pump after the first halving could have been due to supply and demand dynamics, the effect of the following years is more likely the result of a self-fulfilling prophecy, where investors expect the event to raise the price and, therefore, buy in anticipation of it.
Nonetheless, bitcoin’s price historically does, in fact, increase after the halving, and then subsequently fall in price for a significant period of time. This has caused what many see as the market’s natural “cycles,” and these cycles are generally measured according to the four-year period dictated by the halving.
Mining Profitability
The other major effect of bitcoin’s halving is that it reduces profitability for miners. Miners are the entities that secure the bitcoin network. If they are not making a profit from their efforts, they will stop mining bitcoin, and therefore, make the network vulnerable to attack.
With each halving, miners’ profits are reduced by 50%, i.e., halved. This necessitates a significant rise in the price of bitcoin to counterbalance the reduced profits and ensure that operational costs do not exceed the income from mining. The rising price is a critical factor in miners’ profitability, given the relatively constant energy costs, computer costs, and transaction fees compared to the halving of mining rewards.
This creates one of the central problems the bitcoin community contemplates: what happens when the last bitcoin is mined? The traditional answer has been that transaction fees will pay miners enough to keep them protecting the bitcoin network. However, the narrative that bitcoin is digital gold and not everyday currency implies that relatively few transactions will be going through the network, potentially putting the network in danger.
Everything Follows Bitcoin
The bitcoin halving is one of the most pivotal and enigmatic events in the cryptocurrency industry. The historical price trends following each halving have skyrocketed not only bitcoin but the market at large. The whole industry stands at attention, waiting for the action after each halving; this mechanism defines the seasons of the market.
As bitcoin approaches its eventual supply cap, the halving will continue to be a focal point for investors, miners, and enthusiasts alike. Understanding its implications is crucial for anyone involved in the bitcoin ecosystem, as it not only shapes the economic landscape of the cryptocurrency but also influences broader market cycles and investor behavior.
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