The concept of the halving is one of the most important concepts around Bitcoin. Ultimately, it’s about controlling the scarcity of Bitcoin by reducing the mining rewards over time. This article sheds light on what Bitcoin halving is, why it’s so important for Bitcoin, and what it means for the Bitcoin price.
Why the Bitcoin Halving?
Bitcoin was designed by Satoshi Nakamoto as a scarce digital asset, whose maximum amount is limited to about 21 million units. This limitation is anchored in the code of Bitcoin – there will never be more than 21 million Bitcoins in circulation. This predefined scarcity is one of the essential advantages of Bitcoin and contributes to Bitcoin often being referred to as „digital gold“ due to a similar scarcity.
The technical implementation of a cap of 21 million Bitcoins is technically a challenge. There are theoretically various ways to implement this limit:
- One could have created 21 million BTC once at the start of the Bitcoin network and then not issue any further Bitcoins.
- Another option would have been to continuously issue new Bitcoins linearly over a fixed period until the limit of 21 million is approached, after which the issuance of new Bitcoins would be abruptly fall to zero.
- The third option, which Satoshi Nakamoto also chose, is that fewer and fewer new Bitcoins are generated over the years until the 21 million units are reached. This process leads to Bitcoin becoming increasingly scarce – and in this sense, scarcity is increased over the years. To be precise, the amount of newly „mined“ Bitcoins approximately halves every 4 years. Hence the term „Halving“.
The Halving in Detail
The Bitcoin supply has developed since the start of the Bitcoin system in 2008 as follows:
- Years 1 – 4: Miners are rewarded with 50 BTC per block
- Years 5 – 8: Miners are rewarded with 25 BTC per block
- Years 9 – 12: Miners are rewarded with 12.5 BTC per block
- Years 13 – 16: Miners are rewarded with 6.25 BTC per block
- Years 17 – 20: Miners are rewarded with 3.125 BTC per block
- This process continues until the maximum amount of Bitcoins (almost) is reached.
This systematic halving of the block reward ensures that the total amount of Bitcoins in circulation never exceeds the predetermined cap.
What is halved?
It is not the Bitcoin price that is halved, as some media write. Nor is the total amount of Bitcoins halved. Instead, the number of newly created Bitcoins per block is halved, which means a slowdown in the growth of the Bitcoin supply. This is ultimately essential for the scarcity of Bitcoin.
What does the upcoming halving mean economically?
We are in the 16th year after the introduction of Bitcoin and currently, 6.25 Bitcoins per block are distributed as a reward. This corresponds to about 900 Bitcoins daily with an average discovery rate of a block every 10 minutes. This results in an annual growth rate of 1.8%, which is comming close to the growth rate of gold supply, which is estimated to be about 1 to 1.5%.
The predetermined issuance plan of Bitcoin now foresees a further halving, which is expected around April 20th. However, the exact date is not precisely predictable in advance due to the nature of Bitcoin mining, which provides for a halving every 210,000 blocks. A more accurate countdown can be viewed on the website of the Blocktrainer at https://www.blocktrainer.de/live-countdown-zum-bitcoin-halving-2024/.
After the halving, only 3.125 Bitcoins per block, or about 450 Bitcoins daily, will be newly created, which reduces the growth rate to approximately 0.9% per year – thus making Bitcoin even scarcer than gold. Looking four years into the future, the amount of newly created Bitcoins will be halved again to then 225 Bitcoins per day, which corresponds to an annual rate of 0.45%. And so on and so forth…
The maximum number of Bitcoins is expected to be reached in the year 2140, which is due to the fact that the largest part has already been created. So far, 19.7 million BTC have been mined, which corresponds to 94% of the maximum amount of 21 million Bitcoins. The gradual halving of the reward for mining asymptotically approaches the limit, so we are slowly but surely approaching the maximum possible 21 million units.
Figure 1: The Bitcoin supply over time
Source: BlockPit
What does the Halving mean for miners?
Just as with gold, the newly created Bitcoins are allocated to miners. Miners are those actors in the network who confirm transactions and find new blocks. They solve complex mathematical puzzles. The first to solve the puzzle receives the newly mined Bitcoins as a reward, known as the Block Subsidy, as well as the transaction fees incurred.
The upcoming halving of the Bitcoin miner reward from 6.25 to 3.125 BTC per block could lead to miners facing lower incentives. As a result, some may cease their mining activities. This is ultimately expected, as miners have to cover their operating costs – for electricity, hardware, and the like – and mining may no longer be profitable for some of them after the Halving, which could lead to market exit.
A reduction in the number of miners is initially to be seen as negative, as it compromises the security of the system. Because the more miners are active, the more resistant the network is to attacks – we will record an extra episode on Bitcoin, Fiat & Rock’n‘ Roll about this. Historical data shows that after previous Halvings, the hash rate – simply put, the computing power of the miners – often fell by 20-30% in the short term. However, the decline in hash rate was only temporary in the past, and new highs were quickly reached after the Halvings. This can certainly also be attributed to the generally increased Bitcoin price. Interestingly, the hash rate even rose during the last bear market, which was considered an extremely unexpected event. However, it is important to emphasize that these observations are based on a sample size of N=3 and therefore no causal conclusions should be drawn.
What does the Halving mean for the Bitcoin price?
The price of a good is generally determined by the interplay of supply and demand: if demand exceeds supply, the price rises due to increased willingness to pay; conversely, the price falls if supply exceeds demand, as willingness to pay decreases. This also applies to growth rates: if demand growth exceeds supply growth, the price rises; if supply growth is greater than demand growth, the price falls.
With respect to Bitcoin, this means in theory: due to the Halving, the supply of Bitcoins grows slower than before (reduced from 6.25 BTC to 3.125 BTC per block), which would imply a price increase if demand growth remains constant. In practice, the Bitcoin price has increased after each Halving in the past: the price increased by about 8000% within a year after the 2012 Halving, by about 300% after the 2016 Halving, and by about 500% after the 2020 Halving. As for the 2024 Halving, the price development, of course, cannot be predicted. Assuming the growth rate from the last Halving (!), a Bitcoin price of approximately 300,000€ could result.
Figure 2: Bitcoin Halving Cycles
Source: Blockpit
However, nothing can be said with certainty about the upcoming Halving; forecasts are unreliable and the number of observations so far (N=3) is not significant enough to make reliable predictions. In addition, the market has fundamentally changed, including through increased regulatory certainty in the EU, the increased presence of institutional investors, and the fact that the Bitcoin supply is not the only influencing factor on the Bitcoin price.
In my opinion, however, there are four reasons that could speak for a potential price increase of Bitcoin, although this of course does not constitute investment advice:
- Firstly, the lower increase in BTC supply as a result of the Halving could have a positive effect on the price due to increased scarcity.
- Secondly, there is an observed higher demand from institutional investors, which is manifested in several developments: over 30 billion USD have flowed into Bitcoin ETFs (excluding Grayscale’s GBTC) since January – in March, there were days when ETF providers like Blackrock bought over 10,000 Bitcoins, while only 900 Bitcoin are added per day through mining. This ultimately creates a significant excess of demand. Especially here it should be noted that after the Halving, only 450 Bitcoins will be added daily. Furthermore, there are efforts to invest in broad-based ETFs in Bitcoin ETFs. For this purpose, applications have recently been submitted to the SEC, for example by Blackrock. Sovereign wealth funds are also considering investments in Bitcoin. This increased institutional demand could provide a further boost to the price.
- The demand from retail investors also appears to be increased, which is reflected in Google search results. These are as high as they have not been for a year, but they are also far from the highs of 2017, which could imply catch-up potential.
- Another point is that Bitcoins are increasingly being held. This is evident in the fact that many Bitcoins are not moved. This further tightens the Bitcoin money supply available on the market.
Conclusion
Satoshi Nakamoto, the inventor of Bitcoin, has created a fascinating system that demonstrates remarkable resilience, and whose incentive system is inspiring – for example, the transparent and elegant management of the Bitcoin supply, where the Bitcoin Halving also plays an important role. The Halving continuously reduces the growth rate of the Bitcoin supply, leading to increased scarcity. Combined with the current positive demand effects, such as those from Bitcoin ETFs, we could see certain price dynamics in the coming months. Of course, this cannot be said with certainty – time will tell.
