Every four years, an important event occurs in the world of Bitcoin – the halving. As the name suggests, the amount of new Bitcoin rewards that miners receive for processing transactions is cut in half. With the next halving estimated to occur in April 2024, industry experts are anticipating major moves in the cryptocurrency market.
What is a Bitcoin halving, and why does it occur?
A Bitcoin halving refers to a reduction in the block reward that Bitcoin miners receive for contributing computing power to process and validate transactions on the network. Currently, miners receive 6.25 Bitcoin per block, but after the 2024 halving this will be reduced to 3.125 Bitcoin per block.
Bitcoin undergoes a halving event approximately every four years or every 210,000 blocks. During this occurrence, the reward for miners is halved, leading to a 50% reduction in bitcoins earned for transaction verification. The network has generated the maximum supply of 21 million bitcoins, and the halving events are scheduled to occur until this limit is reached.
Significantly, traders find this event crucial as it diminishes the production of new bitcoins, restricting the supply of coins. Consequently, if demand remains robust, prices have the potential to rise. While this has happened in the months before and after previous halvings, the circumstances surrounding each halving are different, and demand for bitcoin can fluctuate significantly.
To understand how Bitcoin halving works, it is important to know how the Bitcoin network operates. Bitcoin’s underlying technology, blockchain, consists of a network of computers (called nodes) that run Bitcoin’s software and contain a partial or complete history of transactions occurring on its network.
Each full node—a node containing the entire history of transactions on Bitcoin—is responsible for approving or rejecting a transaction in Bitcoin’s network. To do that, the node conducts a check to ensure the transaction is valid. These include ensuring that the transaction contains the correct validation parameters and does not exceed the required length. Each transaction is approved individually. This is said to occur only after all the transactions contained in a block are approved. After approval, the transaction is appended to the existing blockchain and broadcast to other nodes.
Bitcoin mining is the process by which people use computers or mining hardware to participate in Bitcoin’s blockchain network as a transaction processor and validator. Bitcoin uses a system called proof-of-work (PoW) to validate transaction information. It’s called proof-of-work because solving the encrypted hash takes time and energy, which acts as proof that work was done. When a block is filled with transactions, it is closed and sent to a mining queue.
Once it is queued up for verification, Bitcoin miners compete to be the first to find a number with a value less than that of the hash. When a miner finds the correct number, they are rewarded with a certain amount of bitcoins.
The History of Previous Bitcoin Halvings
There have been three Bitcoin halvings since the network’s launch in January 2009:
- The first halving took place on November 28, 2012, when the 210,000th block was mined. The mining reward decreased from 50 to 25 BTC.
- The second halving occurred much quicker on July 9, 2016 at block 420,000. The reward fell from 25 to 12.5 BTC.
- Most recently on May 11, 2020, Bitcoin underwent its third halving at block 630,000, with the mining reward dropping to 6.25 BTC where it currently stands.
In the periods preceding and following these three halvings, significant volatility has typically occurred across Bitcoin markets in response to the step down in rewards. Prices reacted strongly in anticipation and around the actual halving dates as buyers and sellers attempted to make sense of shifting supply and demand dynamics.
Details on the Next Upcoming Bitcoin Halving
The next halving is expected to take place in April 2024 when Bitcoin reaches a total of 740,000 blocks mined. At this point, the mining reward will decrease for a fourth time, dropping from 6.25 BTC per block to 3.125 BTC per block.
A Date Difficult to Pinpoint
While the halving is slated to occur upon hitting block 740K, estimating the exact date is challenging because the rate at which blocks are mined fluctuates in accordance with the network’s prevailing hashing power.
The average block confirmation time is around 10 minutes, implying the halving would arrive around April 2024. However, if mining power rises or falls over the months preceding the event, it could happen slightly sooner or get pushed back marginally. Bitcoin experts will refine their projections as the milestone gets closer.
How Will Miners Be Impacted?
The 2024 halving will directly impact miners, reducing the Bitcoin they receive per block confirmation by 50% practically overnight. This can squeeze profit margins for those with older, less efficient mining equipment that has higher operating costs. Many miners will likely shut off older rigs following the halving if mining proves unprofitable. More energy efficient rigs using cutting-edge ASIC chips will still be able to turn a profit, assuming Bitcoin’s dollar value sees appreciation to counter the fewer coins earned.
Mining is expected to remain profitable long-term, but the upcoming halving could lead to further consolidation around the major mining firms. To stay viable, Bitcoin miners will need to meticulously manage costs and upgrade to the latest hardware to maximize efficiency.
What’s in Store for Crypto Investors?
If demand remains strong leading into the halving, basic economic principles point to appreciation in the value of Bitcoin – a built-in supply cut combined with steady or rising demand can lead to higher prices.
Historical Data Suggests Major Bull Runs
Looking back at history, impressive price gains have ensued in the year after previous halvings. Bitcoin rose over 8,000% in the 12 months after the 2012 halving, and over 300% in the following year after 2016. The 2020 halving began a bull run that propelled Bitcoin to an all-time high around $69,000 in late 2021.
However, circumstances can vary each halving. But potentially lower future supply post-halving does impact price models when considered alongside other positive adoption drivers for Bitcoin such as institutional investment and integration by tech firms and financial providers.
How Will Volatility Be Affected?
The Bitcoin halving significantly impacts the supply and demand of Bitcoin, which in turn affects its price and volatility. The halving decreases the amount of new bitcoins generated per block, which means the supply of new bitcoins is lower, making buying more expensive. In normal markets, lower supply with steady demand usually leads to higher prices. Since the halving reduces the supply of new bitcoins, and demand usually remains steady, the halving has usually preceded some of Bitcoin’s largest runs.
Usually, there is an increase in volatility for Bitcoin following the halving. The supply of available Bitcoin decreases, which raises the value of Bitcoin yet to be mined, making it a more attractive asset to investors. However, the price of Bitcoin can be volatile and unpredictable.
Lower inflation rates after the halving lead to new Bitcoin entering circulation at a slower pace. This reduced liquidity could negatively impact Bitcoin’s legendary volatility. Reduced trading volumes may result in more pronounced price fluctuations in response to significant events linked to Bitcoin fundamentals or regulatory changes.
Halving’s tightening influence on new supply may exacerbate this volatility. On the other hand, increased mainstream and Wall Street adoption does inject more stability into the Bitcoin market, which could help offset thinner post-halving liquidity. Regardless, Bitcoin will likely continue exhibiting higher volatility than traditional assets even years down the road.
While it may not seem significant for an asset worth tens of thousands of dollars, cutting the block reward in half does impact Bitcoin economics. Reduced supply typically drives appreciation if demand keeps pace – something proven after previous halvings triggered sensational bull runs. Of course, past performance is no guarantee of future price actions. But Bitcoin halvings usher in new eras – and the 2024 event promises to be part of whatever the next chapter brings for this innovative digital asset. As the milestone approaches, the financial world will have their eyes trained on Bitcoin and the surrounding ecosystem.