Bitcoin Halving Explained: 5 Things Investors Must Know
The 4th Bitcoin halving will happen in April 2024. It’s a big deal for bitcoin and the rest of the crypto market. In this guide, we’ll outline 5 things investors should know about the halving. We’ll start off by explaining what the halving means for Bitcoin (the blockchain, with a big “B”). We’ll then shift the focus to what it could mean for the price of bitcoin (the digital currency, with a small “b”). Let’s jump in.
1. Bitcoin mining creates new bitcoins.
The only way to create new bitcoins is to mine them. Bitcoin mining works like this:
About every 10 minutes, new bitcoin transactions are grouped into transaction blocks. Each block holds around 2,000 transactions. The miner’s job is to attach the block to the blockchain securely. But before that can happen, miners must first validate all the transactions within the block. This involves solving a complex cryptographic puzzle tied to the block.
Cracking this puzzle isn’t easy. It’s like Bilbo Baggins trying to answer Gollum’s Riddles in the Dark. Except here, Gollum is a block, and many Bilbo’s are competing to solve the riddle first.
Miners use special mining software and high-powered computers to try and solve the puzzle. The first miner to solve the puzzle gets to add the block to the blockchain. That miner earns freshly minted bitcoins as a “block reward”. This is how miners create new bitcoins.
Sidenote: Miners also earn bitcoin transaction fees from each block (on top of new bitcoins). If you’re keen to learn more about bitcoin mining and the cryptographic puzzle, download my free mining PDF guide below.
2. The halving will slow the supply of new bitcoin creation.
The Bitcoin halving is when the block reward earned by miners…halves. Right now, miners create 6.25 bitcoins each time they mine a block of bitcoin transactions. That means 6.25 bitcoins are injected into the total bitcoin supply about every 10 minutes. But after the April 2024 halving, that number will halve to 3.125 coins per block. I.e. new bitcoins will be created at half the speed after the halving.
Side note: In crypto speak, the speed at which new bitcoins are created each year is the inflation rate. To get the inflation rate of bitcoin, you divide the supply created each year by the total amount of bitcoins already mined. Since fewer coins will be mined in 2024, bitcoin’s inflation rate will drop. More on this next.
3. Each Bitcoin halving reduces bitcoin’s supply “inflation rate”.
The first Bitcoin halving happened in 2012 – when the block reward halved from 50 bitcoins to 25. It then halved to 12.5 in 2016, and then to 6.25 in 2020.
Notice the pattern here. In bitcoin’s early years, miners created much more coins. But with each new halving, bitcoin’s total coin supply increased by smaller amounts. And it will keep doing this every 4 years until the year 2140. At that point, there won’t be any more coins left to mine, and miners will only earn bitcoin transaction fees.
The 2012 Bitcoin halving caused the biggest drop in bitcoin’s supply inflation rate. Just before that, around 10 million bitcoins had been mined in total. With 50 bitcoins created per block, bitcoin’s supply grew really fast – i.e. its inflation rate was really high at first.
Then, by the 2016 halving, around 15 million bitcoins existed. The number of bitcoins had still increased, just not as fast – so the inflation rate dropped by a smaller amount.
Today, around 19.5 million bitcoins have already been mined – or about 93% of the total 21 million available coin supply. So with each halving, bitcoin does get scarcer, but the impact of the halving on that scarcity goes down.
4. The bitcoin halving will separate the strong miners from the weak.
Miners earn their living by mining bitcoin. After the next halving, miners will earn half as many bitcoins per block. But they’ll still have pretty much the same operational costs (electricity, hardware maintenance, cooling fans, etc). So straight after the halving, mining will become a less profitable business venture.
This won’t be such a problem for the stronger miners with more efficient businesses. But for the weaker miners who are already struggling, it could be the final blow. So post the halving, some of the weaker miners will be forced to unplug their machines and shut down.
If too many miners exit the market, it could cause a short-term drop in the bitcoin hash rate. The hash rate is the amount of computing power that miners use to mine bitcoin. It drops when there’s less mining competition.
If the hash rate gets too low, it could (in theory) make the Bitcoin network less secure. But Bitcoin has been programmed to factor this in. The difficulty adjustment adjusts the difficulty of the mining puzzles to make sure Bitcoin blocks are always produced every 10 minutes on average.
Over the long run, Bitcoin’s hash rate has always trended higher. The hash rate is a direct indication of interest from miners. The fact that it keeps going up over time shows the resilience of the mining industry and the Bitcoin network.
Side note: check out my Bitcoin guide to learn how miners use greener energy sources to cut back on costs.
5. The halving will affect the bitcoin price – the question is how much?
Miners seem to think bitcoin’s value will increase after each halving – or they wouldn’t keep mining bitcoin. But as an investor, what should you think?
Of course, there’s no way to know for sure what bitcoin’s price will do next. But if history is anything to go by, we can expect it to trend higher after the halving. Just keep in mind there have only been 3 Bitcoin halvings in the past – so we don’t have that much historical data to go on.
Here’s a chart that plots bitcoin’s price movements around each halving event.
As you can see, all 3 of bitcoin’s last major bull markets happened after a halving event. And in 2 of those times, the price ran up significantly in the months before the event. And apart from 2020, bitcoin had a decent rally in the months leading up to each halving.
As for why the halving has been good for bitcoin’s price in the past, you could argue it’s because it makes bitcoin a scarcer digital commodity. It could also just be a self-fulfilling prophecy. I.e. investors think the halving will cause the price to go up, so they buy bitcoin, and then it does go up.
Keep in mind that bitcoin is a much bigger asset by market size than it was in the last halvings. So it’s going take a lot more buyers to move the price.
- Miners solve complex cryptographic puzzles to validate transactions and add blocks to the blockchain. They earn new bitcoins as a reward (which is how new bitcoins are created).
- Each Bitcoin halving reduces the block reward miners receive. This slows the speed of new bitcoin creation.
- Bitcoin’s supply “inflation rate” is how fast bitcoin’s supply grows each year. This drops with each halving, but by less than the halving before.
- Mining profitability drops after each halving, potentially forcing less efficient miners out of the market. But Bitcoin’s difficulty adjustment ensures block production remains consistent.
- History suggests bitcoin’s price tends to rise with each having. This could be down to scarcity and/or sentiment around the event. Just keep in mind there have only been 3 halving so far – so there isn’t too much history to go by.
About the author: Jonathan Hobbs holds the Chartered Financial Analyst ® designation. Jon once managed the investments for a boutique crypto hedge fund, and is the author of three investment books. Before that, Jon came from the traditional finance world, working at firms like Morgan Stanley, HSBC, and M&G Investments.