Bitcoin Halving is an event where the reward for mining Bitcoins is halved. This process occurs every four years after 210,000 blocks have been mined, as designated by the creators of blockchain technology. The aim is to gradually reduce the number of new cryptocurrencies introduced.
The initial mining reward was 50 bitcoins, which has been reduced on the following halving dates:
- November 28, 2012, to 25 bitcoins,
- July 2016 to 12.5 bitcoins,
- May 2020 to 6.25 bitcoins.
The last halving was on April 20, 2024, when the reward per block decreased to 3.125 BTC.
As of March 2024, approximately 19.65 million bitcoins were in circulation, with about 1.35 million bitcoins yet to be issued through mining rewards in the future.
Halving is a crucial event that often triggers a bullish trend, making halvings seen as exceptional opportunities in the crypto world. It is essential to note that the halving event occurs approximately every four years, leading to a dramatic reduction in the number of new Bitcoins that can be obtained per confirmed block of transactions. Due to the decrease in new Bitcoins, there will be an increase in electricity costs, which today are around €20,000 per single Bitcoin.
The historical effect of halvings on Bitcoin’s price is impressive:
- The first halving in 2012 caused a price increase from $12 to $1,200 (a 100-fold increase),
- The second halving in 2016 lifted the price from $300 to $20,000 (a 67-fold increase),
- The third halving in 2020 increased the price from $3,000 to $69,000 (a 23-fold increase).
In this context, it is extremely important for cryptocurrency beginners not to miss the effects of halving, as record raises are observed in the months following this event. Additionally, the current situation is particularly interesting, as the world’s largest financial institutions, such as Blackrock, Fidelity, Ark Invest, and others, begin to invest in Bitcoin through spot ETF funds. Expectations are high, with estimates ranging up to $160,000 and $200,000, indicating potential massive growth in the crypto world in the coming months.
Inflation
One of the key concepts for halving rewards is to address concerns about inflation. Inflation is the decrease in the amount of goods that a certain amount of currency can buy at a given time. In the US, inflation is measured by how much it costs to purchase a basket of goods.
There is a certain level of inflation, usually around 2%, which is considered beneficial for the economy. This rate is typically set by central banks as a target, which is not always achievable. Bitcoin Halving is designed to reduce Bitcoin’s inflation impact by lowering the amount of rewards given for mining, thus maintaining its scarcity. However, this mechanism does not protect Bitcoin users from the inflationary effects of fiat currencies into which Bitcoin must be converted for use in the broader economic environment.
Bitcoin demand
As halving reduces the number of new Bitcoins being introduced, demand for new Bitcoins usually increases. This can be observed by the price of Bitcoin after each previous halving event – it usually went up.
Investing
Bitcoin was originally not intended as an investment but was introduced as a payment method that attempted to remove the need for regulatory agencies or third parties in transactions. It became popular among investors when it was noticed that there was potential for profit. Investors flocked to the new asset space and began creating demand that the creators of the cryptocurrency did not foresee.
For investors, halving represents a reduction in the supply of new coins, but it also offers the promise of increasing investment value if the effects of the event remain the same. However, this places investing in Bitcoin in the realm of speculation, as those who invest in the cryptocurrency hope for a profit.
Bitcoin mining
Miners are individuals, groups, or companies that focus on mining for profitability. When new Bitcoins were awarded, miners who received the reward have historically achieved significant profits. Although the price of Bitcoin has fluctuated in the past, the activity remains profitable – if it were not, large mining companies would not continue their operations. However, halving reduces mining rewards, making the activity less profitable with each halving if prices remain the same or fall.
Large mining companies need huge amounts of money and energy to remain competitive, as equipment and facilities require maintenance and people to operate. They also need to upgrade their mining capacity to maintain their position in the industry.
For example, Marathon Digital Holdings, one of the world’s largest mining companies, increased its Bitcoin holdings to 16,930 and its mining fleet to 231,000 in February 2024. This means the company has a hash rate of 28.7 trillion hashes per second (5% of the total hash rate network as of March 2024). Increasing production capacity and reserves is likely a response to expectations of the next halving and the amount of power needed to remain competitive while maintaining the necessary liquidity to finance their operations.
For smaller miners, the reduction in reward means fewer opportunities. Miners who are part of a mining pool will likely experience smaller rewards, even if prices increase – the reward is halved, but the price of Bitcoin is unlikely to double to maintain current profitability unless there is a drastic market event.
Consumers
Consumers and retail users of Bitcoin might be affected by the halving in the value of the Bitcoin they hold. Those who buy Bitcoin to make purchases will generally only be affected by price fluctuations, which may remain the same or similar as before the halving. For those who use Bitcoin to send money, halving means the same as for buyers. The value of their transfers will depend on the market price of Bitcoin after the halving event.
Source: Marathon Digital Holdings, Binance, Swan, Coin Desk, Financial Times.
