So far, there have been three Bitcoin halvings in history. Typically, these happen every four years. The first was in 2012, the second in 2016, and the most recent one was on May 11, 2020. After the last one, the crypto coin went on a rally that culminated in a new all-time high. We will explore the price action impact of each of these halvings and the likely impact of the next one. But first, let’s see what this halving entails.
What is meant by Bitcoin halving?
Bitcoin is based on the blockchain framework. Miners on the blockchain compete to solve an equation set by the system with a specific 64-character solution called a hash. Basically, these miners use computers with much-improved CPU power to try to guess this hash. The first miner to get it right gets to add a block to the blockchain. This block is basically a file containing 1MB worth of BTC transaction records.
The mining process is expensive- the hardware and electricity costs do not come cheap. Therefore, miners who crack the solution are rewarded for their efforts in BTC. During Bitcoin’s inception, miners would receive 50 BTC for adding a block to the blockchain. This was meant to encourage them to keep contributing to the Bitcoin blockchain, even when the coin’s success was unknown.
The total supply of Bitcoin is 21 million coins. Whenever every 210,000 coins are mined, the reward for successful miners is cut by half. This is called Bitcoin halving. The first 210,000 coins were mined in 2012, after which the reward was slashed to 25 BTC. Since then, this halving has been happening every four years. As of the last one in 2020, the reward now stands at 6.25 BTC.
Is halving really necessary?
At face value, the concept of halving seems counter-intuitive. It seems as though this reduction of miner rewards could just drive them away from the BTC blockchain. However, it’s actually an intended feature of the system.
Satoshi Nakamoto, when he was creating Bitcoin, intended for the rewards doled out to miners to decrease as the network generated more from transaction fees. Eventually, after the final halving sometime in 2040, miners will be rewarded in these transaction fees rather than new coins.
Halving also has the advantage of keeping emissions from the coin’s mining under check and reducing its inflation. Since the total supply of BTC is known, it is deflationary in nature as it can’t be printed at will by any centralized body like fiat currency. This contrast can be seen clearly in the latest halving of 2020 when the US was driving up its money supply by quantitative easing programs and interest rate declines. The effects of this drove down the dollar’s growth, while Bitcoin went on to hit a new ATH amid a pandemic.
The halving effect
Usually, every halving causes volatility on the coin’s price, which is why every investor should keep an eye out for these dates. Analysts from Coindesk have alluded to a surge in BTC trading volumes in the month immediately before and after this event. This boils down to demand and supply, as the finite nature of these coins makes them more valuable as their supply slowly diminishes.
Figure 1: Bitcoin’s first halving.
On November 28, 2012, the first 210,000 blocks were added, and the halving occurred. At the time, BTC was trading at a mere $12. The coin went on a slow but sustained bull run, and a year later, it was trading north of $1,000.
Figure 2: Bitcoin’s second halving
From the BTC daily chart above, we see that at the time of the second halving in 2016, the coin was trading at $650. After mining rewards were slashed by half, the coin was bullish for the most part, reaching $2500 just a year later. By the end of 2017, BTC had hit a new ATH of around $19,720.
Figure 3: Bitcoin’s third halving.
The most recent halving was in May 2020, when the coin was trading at $8700. During this time, the coronavirus pandemic was in full swing, and the US had just rolled out its quantitative easing program. Despite the year that followed being tough for most economies, BTC went on to hit a new ATH nearly a year later. In April 2021, it was trading north of $64,000.
Looking at all past events where the mining reward was slashed by half, a theme emerges. Each of the three halvings has been a bullish catalyst for the coin.
2024 halving in focus
Of the 21 million Bitcoin in existence, over 18.5 million coins have already been mined. Nearly 900 new BTCs are being mined on a daily basis, though with improvements in the hardware space, this number could be way higher. Analysts project that the last of these coins will be mined in 2140.
The next halving will be in early 2024, which will grant successful miners a 3.125 BTC stake for each block they add. As with previous halvenings, we expect this will culminate in a long-term bull run for the coin. This is because Bitcoin has etched its place in the market, and its demand is at an all-time high while its supply is slowly dwindling.
However, in the short term, we may see fewer miners attempting to mine the coin and preferring to switch over to other alternative cryptocurrencies that are easier to mine. Bitcoin mining requires an increasingly high degree of complexity of hardware as its supply falls, and the diminishing reward for mining it may not be feasible to some miners.
Bitcoin halving occurs when the reward for successfully mining the coins is slashed in half as its supply reduces. There are 21 million BTC in existence, and every time 210,000 blocks are added onto the blockchain, a halving is done. Nowadays, this phenomenon occurs every four years. The next such occasion is expected to fall sometime in 2024, while the last BTC will be mined in 2140.