Halving: how it affects the price of Bitcoin and mining
January 13, 2023
The Halving of Bitcoin is an event scheduled to occur every four years or so, so as to halve the reward for the creation of new blocks. In this way, Satoshi Nakamoto’s blockchain regulates the issuance of new Bitcoins, so as to limit it in time: let’s find out what effect this could have on the price of the cryptocurrency, delving into the meaning of Halving.
Bitcoin Halving: what is it really?
The value of an asset is closely linked to its scarcity. Gold, for example, is considered a store of value (and a safe haven asset) because its available quantity is by nature limited; the price of an ounce, therefore, should be stable or at most increase over time. Banknotes and fiat currencies, by contrast, have potentially infinite supply: they are printed at the discretion of states and governments; in doing so, however, the value of each unit decreases. In a word, Euros and Dollars are subject to inflation: since the abandonment of the Gold Standard, traditional currencies have progressively lost purchasing power.
The Gold Standard was a monetary system in which the unit of account was tied to the value of a fixed amount of gold. Central banks, therefore, had enough gold reserves to guarantee the conversion of the currency at a fixed rate. The Gold Standard remained in force until 1971, when the United States deemed it unsuitable to support economic growth and the expansion of international trade.
Bitcoin‘s ‘Peer-to-Peer Electronic Cash System‘, as described in the whitepaper, instead recovers the concept of scarcity. Satoshi Nakamoto, in fact, has set the maximum availability of BTC at 21 million units, progressively issued according to a precise reward schedule. In fact, the creation of new Bitcoins is predictable: in a nutshell, for each transaction block added to the blockchain, the miner node that solved the mathematical puzzle gets Bitcoin as a reward. This amount, at the genesis block, was 50 BTC, but is halved every 4 years or so through Bitcoin halving (or halvening): let’s find out what it is and how it works.
In concrete terms, Bitcoin’s protocol produces a block every 10 minutes, a constraint imposed by the code itself. In fact, the mining difficulty is corrected algorithmically every 2016 blocks (about 2 weeks): this makes the calculations more or less complex, so as to respect the predefined rhythm of issuance. This regularity is the first component of Bitcoin’s ‘monetary policy‘, because Halving leverages precisely this ‘internal clock’ and, every 210,000 blocks (i.e. 4 years), decreases the rewards for miners by half. Mining mechanisms and Halving, together, found Bitcoin’s Tokenomics, i.e. the economic model of cryptocurrency, later complemented by its use cases.
In a nutshell, the halving was designed to defer the distribution of Bitcoin so as to control its inflation. According to this plan, the last BTC will in fact be minted in 2140, after 32 Halving events.
Halving’s influence on Bitcoin’s price
Bitcoin is known as Digital Gold and, unlike the precious metal, its actual circulating supply can be verified; the blockchain, in fact, is a transparent ledger that can be consulted by anyone. Thus, many consider Bitcoin to be a digital store of value, although it is only programmed to be so and must also face the market.
In particular, the Halving of Bitcoin is only technically an anti-inflationary mechanism: since the number of coins is fixed and the issuance progressively lower, in theory the cryptocurrency should counteract its own devaluation. Historically, in fact, BTC’s inflation rate is decreasing (or deflationary) and in 2023 stands at around 1.7 per cent: the last Bitcoin mined will eventually cancel out the coefficient.
This, however, is only a statistic, because the price of Bitcoin is then influenced by the law of supply and demand. In fact, if Halving decreases the availability of new BTC over time, it is still market demand that determines the cost. Only if, as supply decreases, demand remains constant or increases should the value of the cryptocurrency rise. The latter is one of the scenarios that Satoshi Nakamoto themself anticipated in an email exchange and, in fact, every Halving of Bitcoin has been accompanied by a price increase so far.
Tracing back the history of Bitcoin’s price, the first Halving in 2012 was followed by an increase of more than 8700%: from $12 to $1046 in little more than a year. Moreover, even in the months leading up to the event, a substantial increase in price was detected; a year earlier, in fact, it was around $2.50. Similarly, in 2016 the second Halving anticipated the All Time High (ATH) close to $20,000 in December 2017, compared to $660 at the time the rewards were halved. Similarly, in 2020 Bitcoin’s $8750 third Halving preceded the November 2021 ATH: almost $64,000.
In general, it would appear that the cryptocurrency reaches new highs 12-18 months after Halving, but these bullish trends could be the result of different causes. The same news and unexpected events (Black Swan) that had the opposite effect on Bitcoin in 2022, triggering an unprecedented bearish cycle. Therefore, it is impossible to make certain predictions, even about the consequences of Halving: as proof of this, the recent Bear Market seems to have disproved the stock-to-flow model, which links the price of Bitcoin precisely to the halving of the reward. The $100,000 hypothetical ATH for 2022, as a matter of fact, has been blatantly refuted by the annual closing at around $17,000.
The countdown to Halving 2024
The future of Bitcoin has only one certainty: the next Halving, which will bring the premium of the miners from 6.25 to 3.125 BTC. These incentives are still crucial, because part of the Bitcoins received by the miners are sold to cover their energy costs and consequently put on the market. So, we might ask what will happen after all Bitcoins are mined and thus in circulation: simply, the miners will receive transaction fees as a reward. In this regard, just under 10% of Bitcoins are left to be mined and, at this rate, the next halving should occur in 2024, at the 840,000th block.
The most accurate countdown, at the time of writing, has calculated the date of the event: it should occur on 24 March 2024, but could vary. As the time per block is often less than 10 minutes, this date could come earlier. We do know for certain, however, that from that point on, around 450 BTC will be issued every day, as opposed to the current 900. Now that you know what Bitcoin’s Halving is and how it works, you might want to look further into the Proof-of-Work mechanism, which is used precisely for the production of the blocks.