Major milestone in the crypto asset market: The Bitcoin halving explained

Explore the impacts of the 4th Bitcoin halving on market value, mining operations, profitability, sustainability, and the overall crypto asset ecosystem.

In brief

• The 4th Bitcoin halving in mid-April 2024 may impact crypto market dynamics, mining operations, and profitability.
• The halving maintains scarcity, a crucial factor for its value in the volatile crypto ecosystem.
• The halving could reduce Bitcoin’s environmental footprint by encouraging energy-efficient mining techniques.

Overview: putting the matter into context

After a period of a lot of media attention around newly launched Bitcoin Spot ETFs in the US, there is another, more technical but fundamental milestone around the corner in 2024 – the 4th Bitcoin halving.

Note: The Bitcoin halving does not refer to a halving of the amount of Bitcoin in circulation and therefore has no effect on the balance on any wallet. Instead, it only refers to the reduction of mining rewards for adding a new block to the blockchain.

The Bitcoin halving is a distinctly innovative concept in the cryptocurrency space. This process directly affects the rewards that Bitcoin “miners” earn for adding a new block to the blockchain. In this context, miners refer to powerful computers that try to generate a cryptographic number (hash) that matches certain criteria. The Bitcoin mining process does not only add transactions to the Bitcoin blockchain, but also verifies and authenticates transactions within Bitcoin’s decentralized network.

After every 210,000 blocks that these miners add to the chain, the number of Bitcoins they receive as a reward is halved. This happens approximately every four years. This event is a built-in feature of Bitcoin, effectively designed to control inflation. At this point in time, there are about 19.5 million Bitcoins that have already been mined, while the maximum supply is fixed at 21 million Bitcoins. Considering all upcoming halvings every 210,000 blocks (~ 4 years), the last Bitcoins will be mined around the year 2140. Consequently, in the next 116 years only 1.5 million Bitcoins will be created, which underlines that the remaining inflation is very marginal from a technical standpoint.

As we advance towards another Bitcoin halving around mid-April 2024, there is considerable speculation regarding how this will affect Bitcoin’s market value, mining operations and profitability as well as overall implications for the global crypto asset ecosystem.

Background

Bitcoin, unveiled in 2009, was designed as an alternative financial ecosystem without the need of central authorities or middlemen. Coincidentally, this followed the financial crisis in 2008. In addition, Bitcoin’s characteristics closely resemble the behavior of natural resources and precious metals – particularly gold – as there is a steadily diminishing supply of new units and an exhaustible total supply. This design aims to make the Bitcoin increasingly more valuable over time by introducing such a built-in supply limit at 21 million units, as opposed to traditional inflationary currencies which do not have any predefined supply ceilings.

Historically, there have been three Bitcoin halving events until today:

1. The first halving took place on November 28, 2012, and saw the block reward drop from 50 BTC to 25 BTC.
2. The second halving took place on July 9, 2016, and saw the block reward being cut from 25 BTC to 12.5 BTC.
3. The third and latest halving took place on May 11, 2020, and brought the mining rewards down from 12.5 BTC to 6.25 BTC.

The forthcoming halving event is going to take place around mid-April 2024, currently estimated to take place on April 19, and will bring the mining rewards down to 3.125 BTC.

Each reward reduction, aiming at maintaining the scarcity and value of Bitcoin, presents challenges for the profitability of miners, who must factor in regular increasing operational costs against decreasing rewards. This leads to the assumption that the market price needs to grow to keep up the economic interest of the miners.

Market dynamics

Historically, the lead-up to and aftermath of these halving events typically see increases in Bitcoin’s market value, resulting in a bullish overall crypto market. This rise is largely due to a slight decrease in the supply of new coins, creating a supply shortfall if demand stays steady or even increases. Expressed in figures, while currently about 900 new Bitcoins are mined per day, the supply will decrease to roughly 450 new Bitcoins on average per day, which is a 50% decrease in supply. Thus, speculative belief considered, the 2024 halving event is anticipated by many to generate an upward pressure on prices as well. Historically, as the whole crypto ecosystem is closely correlated to Bitcoin, these halvings have systematically kickstarted a new phase of growth for the whole crypto market, especially during the months before and after the events (see graph 1).

However, Bitcoin operates in conjunction with intricate market dynamics, making it tough to directly attribute price variations to halving events only. Moreover, the empirical data on only 3 such events is also very limited.

A slight area of concern lies in the mining process itself. Halving the mining rewards inevitably impacts its profitability, which could potentially lead to some miners pulling out due to unsustainable operational costs. This reduced number of miners could potentially pose a security threat to the Bitcoin network, as fewer miners make the blockchain network more susceptible to a 51% attack. This situation occurs when a miner or a mining pool controls over 50% of the network’s mining hash rate or computing power, leading to potential disruptions and double-spending attacks. Therefore, analysts and users of Bitcoin will pay close attention to these developments immediately after such halving events.

The flipside of the halving event and thereby reduced mining rewards could prove beneficial for Bitcoin’s energy consumption and corresponding environmental footprint, which has always been one of its most common criticisms. As the rewards for mining Bitcoin are slashed in half, miners will be driven to seek more energy-efficient techniques and lower energy costs to stay profitable. Those low energy costs are said to be found around non-conservable renewable energy sources like hydroelectric dams and wind turbines. Moreover, on paper, this trend could lead to a lower average energy-consumption per transaction, reducing the overall environmental impact.

Additional important factors to consider

While halving can cause fluctuations within the Bitcoin network, it plays an integral role in maintaining Bitcoin’s most prominent characteristic – its scarcity – a factor making Bitcoin valuable in an otherwise saturated and highly volatile crypto ecosystem. Despite potential downsides for miners, this scarcity could continue to make Bitcoin intriguing for investors in the long run.

Additionally, the effect of Bitcoin halving goes beyond the closed ecosystem of miners and investors. As we are witnessing significant shifts in the traditional global economic landscape with prevailing uncertainties, crypto assets like Bitcoin are being closely watched as potential safeguards against the economic instability of traditional markets. Hence, a lot of traditional investment companies are currently participating in this market by creating their own Bitcoin Spot ETFs.

To conclude, the upcoming Bitcoin halving could fuel the market dynamic of the whole crypto ecosystem once again, making it an important milestone and more than a mere technical event. Media coverage will probably increase over the next few months and thus it is important for corporates and investors to know about the current developments and think about potential implications for them. In addition, the surge of those Bitcoin Spot ETFs make it easier than ever to participate in this market.