Every four years or so, the Bitcoin network experiences an event referred to as the halving. During this time, the block reward for mining Bitcoin is cut in half, meaning that miners will now receive half the reward they did previously.
In this guide, we’ll talk about just how the halving works, why it matters, what has happened during previous ones, and what it could mean for the price of Bitcoin. Let’s jump in.
What is the Halving?
When the Bitcoin network was launched by Satoshi Nakamoto, it was decided that every 210,000 blocks (or around every 4 years) the block reward would be cut in half until the subsidy reaches one satoshi, which is the smallest Bitcoin unit. The block reward is given to the miner who successfully solves the block using proof of work, in addition to the fees they charge, and when Bitcoin launched the reward was 50 Bitcoin per block. Over time, as more halvings occur, the subsidy will eventually reach zero, and miners will receive solely the fees they charge. Until then, miners will receive the fees in addition to their block reward.
The purpose of halving the Bitcoin block reward is to ensure that the hard cap of 21 million Bitcoin is reached at a pace which allows for sustained value and reduced inflation. If the block reward remained at 50 BTC since inception for example, then the total supply of Bitcoin would reach the market too quickly, outweighing the demand and ruining its value. 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 it ensures Bitcoin has a chance at stable value through controlled release of its supply, and in theory this should keep inflation under control.
Why is the Halving Important?
Each time the Bitcoin block reward is halved Bitcoin becomes increasingly costly to mine, both in terms of time and money. Since crypto mining is done by having computers do trillions of calculations a second it costs a lot in terms of electricity and hardware. As the block reward is halved it means a smaller reward for the solve, but it’s also likely that over time there is more and more competition for the reward from other miners joining the network. While this increases network security it also means that it’s likely to get harder and harder to win the block reward. This means that it costs the miners more electricity and/or hardware to increase their odds of solving the block, increasing their cost basis.
This increased cost in theory is 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. It’s possible that at some point it may not be worthwhile for any smaller scale miner to continue to invest in the mining of new Bitcoin, due to the increasing costs involved in doing so. Those 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 and less over time and therefore stabilizes, if not increases, the value of the supply already in the market. It’s Bitcoin’s method for inflation control and is a huge part of Bitcoin’s appeal as a deflationary asset.
Bitcoin’s Halving History
This next halving event will be the fourth time that the block reward has been reduced. The first halving occurred on November 18, 2012, dropping the block reward from the aforementioned 50 Bitcoin down to 25. It then halved again on July 9, 2016 to 12.5 Bitcoin. On May 11, 2020, the block subsidy went down to 6.25 Bitcoin per block. This means the next time the reward is halved will result in a reward of 3.125 BTC per block. It’s not expected to occur until April 2024.
Effect on Bitcoin’s Price
From a theoretical perspective, the halving should always result in Bitcoin’s price increasing. There is less coming to market every block, which should increase the price of coins already in the market as the scarcity will increase. In addition, because miners are getting less of a reward per block, they’re more likely to hold onto it for when the price goes up and they can earn a higher profit on the reward they did get. Of course, this all depends on the price of Bitocin at the time. A miner isn’t going to hold onto their BTC if they need to sell it to cover basic mining costs. Likewise, if the price is very high, they might try to take profits.
Priced In or Time to Buy?
The most difficult thing to decide when talking about with the halving is the overall effect it will have on Bitcoin’s price. Many bullish investors see the halving as a boon to Bitcoin’s value for most of the reasons already mentioned in this article, so we’ll offer some contrasting views.
Those who are bearish about Bitcoin in relation to the halving mention two key points:
The first point is that the halving’s occurrence is not new information. Since Bitcoin’s white paper was released, it has been known that every 210,000 blocks the reward would be halved, so it is quite possible that it is already factored into Bitcoin’s current price.
The other point is that there was only a discernible increase in Bitcoin’s price during the first halving. The second halving had little effect on the market, and the third one wasn’t really any different but it also occurred during the height of the Covid pandemic.
However, pundits of Bitcoin point out that while to the Bitcoin and general crypto community the guaranteed scarcity and halving mechanic of Bitcoin is well-known, the general public isn’t necessarily aware of this provable characteristic. As they become aware there will be new entrants into the market, and this should drive up Bitcoin’s value.