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.
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:
- The first halving took place on November 28, 2012, and saw the block reward drop from 50 BTC to 25 BTC.
- The second halving took place on July 9, 2016, and saw the block reward being cut from 25 BTC to 12.5 BTC.
- 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).