Bitcoin mining companies and investors alike are preparing for the next Bitcoin ‘halving’. Revenues and price gains are the two main things on each of their minds, as are the previous halvings. But maybe you don’t even know what the halving is and are wondering why anyone cares. If that’s the case then you’re in the right place as we’re going to discuss what it is, why it matters, and when it’s going to happen next. Let’s jump in.
What is the Halving?
When the Bitcoin network was created by Satoshi Nakamoto, they decided that every 210,000 blocks (around every 4 years) the block reward would be cut in half until the subsidy reaches one satoshi, the smallest Bitcoin unit or 0.00000001 BTC.
Bitcoin’s block reward is given to the miner who successfully solves the block using proof of work, in addition to the transaction fees from that block. When Bitcoin first launched, the block reward was 50 BTC per block. With each halving that occurs, the subsidy will eventually reach zero, and then miners will receive solely the transaction fees from that block. Until then, miners will receive the transaction fees in addition to their block reward.
The purpose of the Bitcoin block reward halving every 4 years is to ensure that the hard cap of 21 million BTC is reached at a pace which allows for sustained value and low inflation. If the block reward remained at 50 BTC for example, then the total supply of Bitcoin would reach the market too quickly, outweighing the demand and ruining its value.
The Bitcoin halving can be looked at like mining gold in this manner; as gold is mined it makes it exponentially more difficult to find and mine more, thus making what has already been mined more valuable or at a minimum stabilizing its value. By halving the block reward every 210,000 blocks, Bitcoin has a chance at stable value through controlled release of its supply, and in theory this will keep inflation under control.
Why is the Halving Important?
As mentioned in the introduction, mining operations and investors alike are always interested in the halving. This is because each time the Bitcoin block reward is halved, Bitcoin becomes increasingly costly to mine, both in terms of time and money. Since Bitcoin mining is done by having computers do endless calculations a second it costs a lot in terms of electricity and computational hardware such as mining rigs.
When the block reward is halved it means a smaller reward for the miners, but it’s also likely that over time there will be more and more competition for the reward from other miners joining the network. While more miners increases network security, it also means that it’s going to get harder and harder to win the block reward. This results in more costs to mining operations in terms of electricity and/or hardware to increase their odds of solving the block, which increases their cost basis.
This increased cost will in theory be passed onto the buyer in the form of higher fees to process their transaction so that it is worthwhile for the miner. With each halving the miner’s block reward will be decreased and the fees they charge will likely be increased. Though this will be dependent on Bitcoin’s price.
It’s likely that it may become infeasible for smaller scale miners to continue to invest in the mining of new Bitcoin, due to the increasing costs involved in doing so and decreasing likelihood of getting the reward. This means larger mining companies with infrastructure in place will have an advantage over any newcomer.
The halving causes the new supply of Bitcoin coming into the market to be less over time and therefore stabilizes, if not increases, the value of the BTC already in the market. The halving is essentially just Bitcoin’s method for inflation control and is a huge part of Bitcoin’s appeal as a deflationary asset.
When is the Next Halving?
The next Bitcoin halving is going to occur in April 2024. When it happens, the block reward will change from 6.25 BTC per block, to 3.125 BTC. This means that all mining companies will now be getting half the BTC they were before for successfully mining a block.
The last halving was in May 2020, and it reduced the block reward from 12.5 BTC to the current 6.25 BTC. The price was around $8k USD and was closer to $11k about 6 months later. It will be interesting to see what happens to price action this time round.
Though not everyone realizes it, the Bitcoin halving is an extremely important event both for investors and mining companies.
It marks a reduction in supply coming to market and the market often responds accordingly. However, with the excitement around the potential for spot Bitcoin ETFs, and the legitimization that provides, this halving may be unlike any before.