The Impending Bitcoin Halving: New Potential Effects on the Market

• The fourth Bitcoin halving expected to occur on April 20th at block height 840,000. At this point, the block reward will decrease from 6.25 BTC to 3.125 BTC.
• The halving will pressure miners’ profitability by slashing the block rewards in half, prompting more efficient mining operations while making transaction fee revenue increasingly important.
• Rising demand for Bitcoin could potentially offset selling pressures and the reduced issuance, potentially driving prices upwards.

Backdrop

Amid an uncertain macroeconomic environment—persistent inflation, imminent federal funds rate cuts, upcoming election-related repercussions, geopolitical tensions, and record levels of debt—one thing remains constant: Bitcoin’s fourth halving. Since the mining of the first block in 2009, Bitcoin has operated as a scarce, decentralized digital currency with a predetermined monetary policy, predictable inflation rate, and a fixed supply cap of 21 million BTC. This week marks the fourth halving in the 15 years since Bitcoin’s inception—an event crucial to its economic policy and global value proposition.

This article explores the significance of Bitcoin’s halving, its impact on key stakeholders within the ecosystem, and how the upcoming fourth halving could affect BTC prices.

The Significance of ‘Halving’

Each halving event is a critical milestone in Bitcoin’s lifecycle, directly impacting its issuance and inflation rate by reducing the block rewards—new bitcoins issued to miners to incentivize block production and maintain network security—and potentially impacting BTC’s market value due to increased scarcity.

As implied by its name, a “halving” refers to the reduction of Bitcoin’s issuance by half, effectively halving the rate of inflation (the rate at which new bitcoins enter the market). With this halving, Bitcoin’s issuance will drop from 900 bitcoins per day (an issuance rate of 1.8%) to 450 bitcoins per day (0.9%). Thus, the rewards miners receive for verifying new blocks and maintaining network security (excluding fees) will also be halved, impacting their incentive levels and profitability. Halvings are programmed to occur every 210,000 blocks, roughly every four years, and are unchangeable—rules governing this process are embedded in Bitcoin’s core code.

Bitcoin’s monetary policy, as shown in the figure above, has experienced three halvings since its inception, each reducing miners’ block rewards by half. The first halving in November 2012 decreased rewards from 50 BTC to 25 BTC, followed by a second halving in July 2016 that reduced it to 12.5 BTC, and the most recent halving in May 2020 brought it down to 6.25 BTC. The upcoming halving is scheduled for April 20th at block height 840,000 and will further reduce the block reward to 3.125 BTC.

However, as Bitcoin continues to follow this schedule, with a decreasing issuance rate and 19.7 million of the 21 million supply already mined, each new halving will have an increasingly smaller impact on the overall supply. Thus, as Bitcoin nears its supply cap, the significance of future halvings will gradually diminish.

Miner Economics and Incentives

Miners are indispensable players within the Bitcoin ecosystem, pillars of the blockchain’s security and integrity. They use the computational power of specialized hardware to hash transaction data, seeking a nonce—the solution to a hash function that, when found, validates a new block and adds it to the Bitcoin blockchain.

Miners receive block rewards (block subsidies) as compensation for their computational efforts, which include a predetermined number of newly minted bitcoins and transaction fees from transactions included in the block.

Block subsidies are the primary economic incentive for miners. However, with this reward cut from 6.25 BTC to 3.125 BTC, miners will face pressures as a significant source of revenue diminishes. Meanwhile, transaction fees are expected to become increasingly important to miners’ income and, as demand surges, the value of Bitcoin is likely to appreciate.

Since the third halving, revenue from block subsidies has climbed to $43 billion, an increase of 180% over the period before the 2016 halving. Although transaction fees currently represent a small portion of total miner revenue, with each halving, the importance of transaction fees grows, with total revenue from fees doubling since the last halving to $2.5 billion.

Mining total revenue continues to reach new highs, with block rewards on March 11th alone exceeding $76 million, a historical peak. Although block subsidies will decrease in BTC terms, the rising market value of Bitcoin offsets this decline, thereby increasing miners’ revenue in USD terms. With Bitcoin performing strongly at the start of this year, miners hope this trend continues post-halving.

Moreover, Ordinals, which can inscribe data such as images, videos, and text into NFTs, also increase transaction fees for miners. In the first quarter of 2024, miners averaged $3 million per day in transaction fees, far above historical standards. In fact, in May and December 2023, transaction fee revenues spiked to $17 million and $24 million, respectively, accounting for nearly 40% of miners’ total fee income at the time. As “Runes” (fungible tokens on the Bitcoin network) are set to launch alongside the halving event, miners can expect further increases in transaction fee income to offset the decline in block subsidies.

Mining Profitability and Efficiency

Mining profitability is intricately linked to the efficiency of the mining hardware used and the cost of electricity required to power it. The ASIC Breakeven Power Consumption chart provided depicts this relationship, reflecting the maximum electricity costs (per kWh) at which different ASIC models (Application-Specific Integrated Circuits) used in Bitcoin mining can remain profitable.

Newer ASIC models, such as the Antminer S19 and S19 XP, are profitable under electricity costs below $0.13/kWh and $0.20/kWh, respectively, compared to older models like the S9 and S17. This is due to technological advances in ASIC design, which have produced more energy-efficient miners, allowing profitable mining operations under higher electricity costs. However, this metric will be halved, and even at an electricity cost of $0.08/kWh (the average industrial electricity rate in the US), these models will no longer be profitable. As the fourth Bitcoin halving approaches, miners with the most efficient hardware and cheapest electricity will be better equipped to withstand the reduction in block rewards.

As a result, mining companies have been adopting various strategies, such as partnering with renewable energy providers, operating near cheaper, sustainable energy sources, implementing advanced cooling technologies, and utilizing surplus energy to enhance sustainability and profitability. Those with older, less efficient hardware will find it increasingly difficult to maintain profitable operations, which may lead to a consolidation of mining power among the most efficient operators and gradually phase out inefficient ASICs from the network.

This, in turn, could affect the hash rate—a metric of computing resources allocated to mining. Prior to the halving, Bitcoin’s hash rate had grown to 605 EH/s. However, following the halving, the hash rate typically experiences a temporary decline due to less efficient hardware going offline. To maintain the targeted 10-minute block time, a drop in hash rate could lead to an adjustment in Bitcoin’s difficulty, mitigating the hashing process under changing conditions.

Impact of Demand-Driven Factors

While halving is a supply-side event, the diminishing impact of issuance suggests that demand plays a crucial role in driving the market value of inelastic supply assets like Bitcoin. The launch of a spot Bitcoin ETF in January sparked substantial new demand, altering the dynamics of the Bitcoin market compared to previous halving cycles. Continuous inflows of funds into US-approved and recently approved Hong Kong BTC exchange-traded products, along with other demand sources from funds to publicly listed company balance sheet holdings and smart contracts, will help more effectively absorb pressures from forced selling and new issuance supply.

Price Dynamics

As with each halving, one key question on everyone’s mind is: How will the halving impact Bitcoin’s price? While we can draw some insights from the performance of past halving cycles, they may not directly indicate what will happen in the future. Given the different market conditions and investor scenarios, having only experienced three halvings before—despite being a well-known event—predicting whether the halving will impact prices could be misleading.

Bitcoin’s prices tend to follow a four-year cycle. Looking back at each halving, Bitcoin’s price has significantly increased in the year following each halving event. Before the first halving in 2012, Bitcoin’s return exceeded 14,000%. After the first and second halvings, Bitcoin’s price increased by 5,100% and 1,200%, respectively, ultimately reaching a new all-time high about 500 days after the halving. Today, before the fourth halving, we have already witnessed a 664% appreciation, with BTC reaching a new all-time high of $73,000 before the halving for the first time.

The demand sparked by the ETF, along with subsequent attention, has led to a slightly different dynamic pattern, poised to play a larger role in the future. Other factors might also drive demand-side growth, such as broader macroeconomic and liquidity changes, regulatory shifts, growth in global digital asset adoption, and speculative behaviors, all of which could influence Bitcoin’s price trajectory.

The historical downtrend chart above reflects the resilience of Bitcoin’s price trajectory. Although prices have consistently pulled back more than 70% from all-time highs during each halving cycle, they rebound and reach new highs at the start of each cycle. With the fourth halving approaching—and although BTC has already reached an all-time high even before the halving—it’s important to consider price fluctuations that may arise from external conditions or increased attention and speculation regarding the halving.

Bottom Line

Bitcoin’s halving embodies a predictable monetary rhythm amid an uncertain financial environment. Bitcoin’s inherent scarcity and deflationary nature make it a unique asset across economic cycles. While the reduction in block rewards will pressure miners, it will also drive them towards more efficient, sustainable operations. The confluence of this supply-side event and strong demand-driven factors suggests that Bitcoin is ready for the next stage of growth. With innovations like the upcoming Runes and Bitcoin L2s, improved transaction fees, and scalability, Bitcoin is ready to embrace the next era.