Main points of the text:
- Bitcoin is expected to usher in its fourth halving on April 20 (block height 840,000), when the block reward will drop from 6.25 BTC to 3.125 BTC.
- Miners’ profitability will be under pressure due to the halving of issuance revenues, which will facilitate more efficient mining operations, while transaction fee revenue streams will become increasingly important.
- The continued increase in demand for bitcoin is likely to offset the selling pressure, as well as a decrease in issuance, driving price action.
1. Preface
In the current environment of macroeconomic uncertainty – persistent inflation and looming cuts in the federal funds rate, impending election-related ripple effects, geopolitical tensions, and record debt levels – one thing is certain and that is the fourth halving of Bitcoin. With the mining of the first block (the genesis block) in 2009, Bitcoin was born as a scarce, decentralized digital currency with a predetermined monetary policy, predictable inflation, and a fixed supply of 21 million BTC. This week, the Bitcoin network will celebrate its fourth halving in 15 years – an event that is critical to its economic policy and global value proposition.
In this article, we take a look at the importance of the Bitcoin halving, the impact of the Bitcoin halving on key stakeholders in the ecosystem, and how the BTC price will be affected as the fourth Bitcoin halving approaches.
2. The importance of “halving”.
Each halving event is a pivotal moment in Bitcoin’s lifecycle, as it directly impacts Bitcoin’s issuance and inflation rate, reduces block rewards (newly issued bitcoins that incentivize miners to produce blocks, maintain network security), and can impact BTC’s market value due to greater scarcity.
As the name suggests, “halving” refers to the halving of Bitcoin issuance, effectively halving the Bitcoin inflation rate (the rate at which new bitcoins enter the market). With this halving, the issuance of bitcoins will drop from 900 bitcoins per day (1.8% issuance rate) to 450 bitcoins per day (0.9% issuance rate). As a result, miners will also be rewarded for validating new blocks and securing the network (excluding fees) in half, which will affect their incentive levels and profitability. The halving is set to occur every 210,000 blocks, or roughly every 4 years, and is immutable – the rules that govern this process are written into the underlying code of the Bitcoin network.
Bitcoin’s monetary policy is illustrated in the chart above. Since its inception in 2009, the network has undergone three halving events, each time halving miners’ block rewards. The first halving in November 2012 reduced the reward from 50 BTC to 25 BTC, followed by the second halving in July 2016, which reduced the reward from 25 BTC to 12.5 BTC, and the most recent halving event occurred in May 2020, reducing the reward from 12.5 BTC to 6.25 BTC. The upcoming halving is expected to take place on April 20 (block height 840,000) and further slash the block reward to 3.125 BTC.
However, Bitcoin continues to evolve on this schedule, and with the issuance rate declining and 19.7 million of the 21 million supply cap being mined, each new halving will have less and less impact on the overall supply. As a result, as Bitcoin approaches the upper limit of its limited supply, the importance of future halvings will also wane.
3. Miner economy and incentives
Miners play an integral role in the Bitcoin ecosystem and are the backbone of blockchain security and integrity. They use the computing power of specialized hardware to hash transaction data, find a solution to a nonce – a hash function, and when a nonce is found, validate a new block and add it to the Bitcoin blockchain.
In return for the computational work, miners receive a block reward (block subsidy) consisting of a predetermined amount of newly minted bitcoins and transaction fees for the transactions contained in the block.
Block subsidies are the main financial incentive for miners. However, as this reward is cut from 6.25 BTC to 3.125 BTC, miners will be under pressure as a large number of revenue streams are reduced. Transaction fees are expected to become increasingly important to miners’ income, and the value of Bitcoin will also increase in value as demand increases significantly.
Since the third halving, Bitcoin revenue from the block subsidy has climbed to $43 billion, 180% higher than the previous halving in 2016. While transaction fees currently account for a relatively small percentage of miners’ total revenue, they have become increasingly important with each halving, doubling the total revenue from the previous halving to $2.5 billion.
Total mining revenue continues to reach new highs, with a record high of more than $76 million in block rewards on March 11 alone. Although the block subsidy will be reduced in BTC terms, this decline is offset by the rise in Bitcoin’s market value, resulting in more dollar-denominated income for miners. With Bitcoin going strong at the start of the year, miners are hoping that this trend will continue after the halving.
In addition, Ordinals can engrave data such as images, videos, and text into NFTs, which also increases transaction fees for miners. In the first quarter of 2024, miners earned an average of $3 million per day in transaction fees, well above historical standards. In fact, in May and December 2023, transaction fee income soared to $17 million and $24 million, respectively, accounting for nearly 40% of miners’ total fee income at the time. With the upcoming launch of “Runes” (fungible tokens on the Bitcoin network) to coincide with the halving event, miners can expect to see a further increase in transaction fee revenue, offsetting the decline in block subsidies.
4. Mining profitability and efficiency
The profitability of mining is complexly linked to the efficiency of the mining hardware used and the cost of electricity required to power it. This relationship is depicted in the ASIC break-even power consumption chart provided below, which reflects the maximum cost of electricity (in kWh) that the different ASIC models (ASICs) used in Bitcoin mining can maintain profitability.
Newer ASIC models, such as the Antminer S19 and S19 XP, are profitable compared to older models such as the S9 and S17 at a cost of less than $0.13/kWh and $0.20/kWh for electricity. This is because technological advancements in ASIC design have led to more energy-efficient miners, allowing for profitable mining operations in the face of higher electricity bills. However, this indicator will be cut in half, and even at $0.08/kWh (the average industrial electricity rate in the United States), these models of miners will not make any money. As the fourth Bitcoin halving approaches, miners with the most efficient hardware and cheapest electricity will be better able to withstand the reduction in block rewards.
As a result, mining companies have been employing various strategies, such as partnering with renewable energy providers, operating near cheaper sustainable energy sources, implementing advanced cooling technologies, and utilizing idle energy to improve sustainability and profitability. Those with older, less efficient hardware will find it increasingly difficult to maintain profitable operations, which could lead to the consolidation of mining power among the most efficient operators and the gradual elimination of inefficient ASICs from the network.This, in turn, may 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, after the halving, the hash rate usually drops temporarily due to less efficient hardware going offline. In order to maintain the target block time of 10 minutes, a decrease in the hash rate may lead to a downward adjustment of the Bitcoin difficulty, thereby easing the hashing process in the changing environment.5. The impact of demand driversWhile the halving is a supply-side event, the weakening impact of the issuance suggests that demand plays a crucial role in driving the market value of inelastic supply assets like Bitcoin. The launch of spot bitcoin ETFs in January has spawned a lot of new demand, changing the dynamics of the Bitcoin market compared to previous halving cycles. Continued inflows into the US and the recently approved Hong Kong BTC exchange-traded products, as well as other sources of demand from funds to listed companies’ balance sheet holdings and smart contracts, will help absorb the pressure from forced sell-offs and new issuance supply more effectively.6. Price dynamicsAs with every halving, there is an important question on everyone’s mind: how will the halving affect the price of Bitcoin? While we can infer some insights from the performance of past halving cycles, it may not be a direct indication of what the future holds. Considering that we have only experienced three halvings before (although this is a well-known event) in different market conditions and different investor situations, it can be misleading to predict whether the halving will affect the price.
The price of Bitcoin tends to be in a four-year cycle. If we look back at each halving, we can see that the price of Bitcoin has risen significantly in the year following each halving event. Before the first halving in 2012, Bitcoin returned more than 14,000%. After the first and second halvings, the price of Bitcoin increased by 5,100% and 1,200%, respectively, eventually reaching an all-time high about 500 days after the halving. Now, before the fourth halving, as of April 15, we have witnessed a 664% appreciation in value, with BTC reaching an all-time high of $73,000 for the first time before the halving.
The demand sparked by ETFs, and the subsequent attention, has led to a slightly different dynamic landscape and is expected to play a larger role in the future. A number of other factors may also drive demand-side growth, such as broader macroeconomic and liquidity changes, regulatory changes, increased adoption of digital assets globally, and speculation, all of which could affect Bitcoin’s price action.
The historical decline chart above shows the resilience of Bitcoin’s price trajectory. Although the price has retraced more than 70% from its all-time highs during the halving cycle, it has rebounded and reached new highs at the beginning of each cycle. With the fourth halving approaching – even though BTC had reached new all-time highs even before the halving – it is important to take into account the price volatility that may arise from external conditions or increased attention and speculation on the halving.
7. Conclusion
The Bitcoin halving reflects a predictable pace of money in an uncertain financial environment. Bitcoin’s inherent scarcity and deflation make it a unique asset across economic cycles. While the reduction in block rewards will put pressure on miners, it will also push them towards more efficient and sustainable operations. This confluence of supply-side events and strong demand drivers suggests that Bitcoin is ready to move into the next phase of growth. Bitcoin has no shortage of innovations, such as the upcoming Runes and Bitcoin L2s, increased transaction fees and scalability, and Bitcoin is ready for the next era.