In 10 days, on the 840,000th block on the Bitcoin blockchain, one of the most anticipated events in the cryptosphere will take place. “Halving Day” takes place every four years and has historically had a significant impact both on the Bitcoin network with a capital “B”, and on its digital currency, bitcoin with a small “b”. Between April 18 and 19, at the current rate of creation of new blocks on the blockchain, the remuneration of bitcoin miners will be halved. What should you expect? Here's a preview.

Bitcoin and its economic model

Bitcoin's business model was designed to mimic the scarcity and value preservation of precious metals, such as gold. Just as the supply of gold can increase through mining industry and processes – which involve people, equipment and energy – more bitcoins are created in a process called mining. .

But instead of physically digging up the earth, bitcoin “miners” use powerful computers to solve complex mathematical puzzles. These miners compete with their machines to be the one to solve a cryptographic equation that is extremely complicated to solve. This digital mining process adds new “blocks” (groups of bitcoin transactions) to the “blockchain,” a public ledger that records all transactions.

To financially motivate miners for their energy expenditure to add a new block to the blockchain, miners receive a reward in bitcoins. This reward is halved approximately every four years or after every 210,000 blocks mined. The reward started at 50 bitcoins per block in 2009 and has since decreased every four years, reaching 6.25 bitcoins during the last halving in 2020. Four years later, on April 18, 2024, the reward will decrease to 3.125 bitcoins per block. In other words, the rewards that miners will receive for validating transactions and adding them to the blockchain will be reduced by 50%..

Returning to the parallel between the value of bitcoin and a precious metal, precious metals often become more difficult to find and mine over time, which affects their supply and price. Likewise, Bitcoin mining rewards are halving, which in some ways makes new bitcoins rarer. This scarcity is at the heart of Bitcoin's value proposition, which theoretically has the effect of increasing or preserving its value over time, if and only if demand increases or remains constant.

Although precious metals mining and Bitcoin mining may share some conceptual similarities, there are also notable differences.

Unlike gold mining, where the discovery of new veins can increase supply unpredictably, the issuance of bitcoins is not subject to such variability.

Bitcoin operates on a predetermined and transparent supply schedule, ensuring that its issuance remains consistent regardless of market fluctuations. The halving event ensures that the total supply of bitcoins will never exceed 21 million, making bitcoin a disinflationary asset. As of April 2024, approximately 19.65 million bitcoins are in circulation, or 93.6% of the planned 21 million, leaving only approximately 1.34 million to be released (6.4%) via mining rewards.


Number of bitcoins in circulation

Glassnode

The next Bitcoin halving, between April 18 and 19, 2024, will reduce the issuance of new BTC from 900 to 450 per day. The rewards system is expected to continue until 2140, at which point the proposed limit of 21 million bitcoins will theoretically be reached.

The impact on the price of bitcoin

With around 10 days until the Bitcoin Halving Event (Halving Day), speculation is hitting investors given that Halving is undeniably one of the most important events in the world of digital assets. This mechanism, hard-coded into the Bitcoin protocol, is expected to have immediate and long-term consequences on the available supply and valuation.

Historically, halvings precede bull markets, indicating a potential rise in value after the event.

Previous halving dates were:

  • November 28, 2012, at 25 bitcoins
  • July 9, 2016, at 12.5 bitcoins
  • May 11, 2020, at 6.25 bitcoins

The chart below shows bitcoin's performance over the 365 days following the event.

Bitcoin performance in the 365 days after Halving
Glassnode

During the first Halving which reduced the reward from 50 BTC to 25 BTC per block, the performance over the following 365 days reached +7,745%. The next two Halvings, which increased the reward from 25 BTC to 12.5 BTC, then from 12.5 BTC to 6.25 BTC, caused the digital currency to rise by approximately 370% over the following 365 days. Many market players are still hoping for such performances for this Halving in a few days, especially since with the increase in demand for Bitcoin Spot ETFs the impact of the halving on the market could be amplified . But for the moment, these projections are confined to the framework of speculation.

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The impact on bitcoin miners

This reduction effectively doubles the cost of producing BTC for miners, which represents a challenge in terms of profitability. While transaction fees paid by users may offset some of this increased cost, they represent a more volatile revenue stream, which adds an element of unpredictability to miners' earnings.

Miners contribute significantly to the force of selling pressure on the price of bitcoin. They receive all the newly issued bitcoins, most of which they must sell to fund the operating expenses of their mining business.

For small miners, a decrease in reward means decreasing profitability. Miners who are part of a mining pool will likely receive lower rewards even if prices increase: the reward is cut in half, but the price of bitcoin will likely not double within a month to maintain current profitability, at unless a radical market event occurs.

The weakest miners on the network will be eliminated and the selling pressure will be significantly reduced, since they will no longer need to sell bitcoins given that they will potentially go bankrupt.

On the other hand, if less efficient miners decide to suspend operations due to rising costs, the remaining active miners could actually see their profitability increase. This is because less competition for the same block rewards means a greater chance of earning those rewards for miners who continue to operate.

When inefficient miners capitulate, mining difficulty decreases and more efficient miners are rewarded with more BTC. Once weak miners have been removed from the network, margins improve for the remaining miners, which also reduces selling pressure to cover expenses.

Although we do not know exactly how market participants will react after Halving Day, it is very likely that many investors are positioning themselves ahead of time to hope that past performances linked to this event will repeat themselves once again.

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