Bitcoin Halving: A Complete Guide for Crypto Investors

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Bitcoin halving

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Are you curious about the hype around Bitcoin halving? It’s one of the most anticipated events in the crypto world and has a big impact on Bitcoin’s supply and price, which in turn affects other digital assets. 

Whether you’re a seasoned investor or just starting out, it’s important to understand what halving is, how it works, and how it may shake up the market. 

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In this article, we’ll explore the basics of Bitcoin halving, its historical impact, and what you should expect as an investor.

Key Takeaways:

  • Bitcoin halving is a major event that reduces the block reward for mining Bitcoin by 50% approximately every four years.
  • The purpose of halving is to control Bitcoin’s inflation rate and manage its total supply, which prevents the digital asset from being issued too quickly.
  • Historically, Bitcoin halving events have been associated with significant price increases, driven by the reduced rate of new coin creation.
  • The most recent halving happened on April 19, 2024, reducing the block reward to 3.125 BTC per block.

What is Bitcoin Halving?

Bitcoin halving is a pre-programmed event that happens about every four years or after every 210,000 blocks are mined on the Bitcoin blockchain. A block is a file containing 1 megabyte (MB) of Bitcoin transaction records on the Bitcoin blockchain. 

Each block is a collection of validated transactions that are permanently added to the blockchain, forming a chain of blocks. This structure ensures the integrity and security of Bitcoin’s transaction history.

Block rewards are an important part of the blockchain’s automated process for validating transactions and creating new blocks, known as mining. Miners, who participate in a competitive race to solve cryptographic puzzles, are rewarded with new bitcoins if they are the first to solve the puzzle. 

Once a miner successfully adds a block to the blockchain, they receive the reward, and the network initiates a new race. As this process continues, all miners confirm the data in the newly added block while simultaneously attempting to solve the puzzle for their blocks, with the hope of earning a reward that decreases over time.

In essence, what the halving process does is reduce the rate at which new Bitcoins are created, effectively decreasing the supply of new coins entering the market. Likewise, the reward that Bitcoin miners receive for adding a new block to the blockchain is also reduced by half during the halving event. 

Recommended reading: Bitcoin Halving Chart 2024: Key Highlight and Insights

Bitcoin’s halving mechanism is a key part of its design, created by Satoshi Nakamoto. The goal of halving is to manage inflation by gradually reducing the number of new Bitcoins introduced over time.

Note that Bitcoin has a fixed supply cap of 21 million coins as detailed in the Bitcoin whitepaper. Once 21 million bitcoins have been generated by miners in the Bitcoin network, the total supply will have been reached, and no more bitcoins will be created. This limit is hardcoded into the Bitcoin protocol, ensuring a finite number of bitcoins will ever exist.

Overall, halving events helps ensure that the total supply is not reached too quickly, thereby maintaining Bitcoin’s scarcity and value proposition.

“Bitcoin undergoes halvings due to the design of its software, which was created by an enigmatic individual or group known by the pseudonym – Satoshi Nakamoto.”

How Bitcoin Halving Works

Bitcoin halving image representation 

If you want to know how Bitcoin halving works, it’s important to understand the basics of Bitcoin mining. Bitcoin operates on a Proof-of-Work (pow) consensus mechanism, where miners use computational power to solve complex mathematical problems and validate transactions on the blockchain. For their efforts, Bitcoin miners are rewarded with newly minted Bitcoins, along with transaction fees.

When Bitcoin was first launched in 2009, the block reward was set at 50 BTC per block. After the first halving in 2012, the reward dropped to 25 BTC, then to 12.5 BTC after the second halving in 2016. 

The third halving in 2020 saw the Bitcoin reward drop to 6.25 BTC followed by the recent 2024 halving which reduced the reward further to 3.125 Bitcoins per block. The next halving is scheduled to take place in 2028 and the reward will fall to 1.562 BTC. 

This halving process continues until the block reward effectively reaches zero, at which point no new Bitcoins will be created, and miners will rely solely on transaction fees for their income. This final stage is expected to occur around the year 2140.

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“One criticism of Bitcoin’s design—particularly its halving events and the finite supply of 21 million coins—is that it incentivizes users to save rather than spend, with the expectation that the value of the coins will increase over time.”

Historical Impact of Bitcoin Halvings

Bitcoin halving chart

Bitcoin halvings have historically had a significant impact on the price of Bitcoin, as well as on the broader cryptocurrency market. Here’s a look at how previous halvings have influenced Bitcoin’s price and market behavior:

2012 Halving

  • Date: November 28, 2012
  • Block Reward Reduction: From 50 BTC to 25 BTC
  • Price Before Halving: Approximately $12
  • Price One-Year Later: Approximately $1,000

The first halving event saw a massive increase in Bitcoin’s price, driven by the reduced supply and growing awareness of the cryptocurrency. The price surged from around $12 at the time of the halving to over $1,000 within a year, marking the beginning of Bitcoin’s journey into mainstream consciousness.

2016 Halving

  • Date: July 9, 2016
  • Block Reward Reduction: From 25 BTC to 12.5 BTC
  • Price Before Halving: Approximately $650
  • Price One-Year Later: Approximately $2,500

The second halving in 2016 also led to a significant price increase, although the effect was more gradual compared to the first halving. Bitcoin’s price rose steadily after the halving, reaching around $2,500 a year later and eventually culminating in the historic bull run of late 2017 when Bitcoin nearly touched $20,000.

2020 Halving

  • Date: May 11, 2020
  • Block Reward Reduction: From 12.5 BTC to 6.25 BTC
  • Price Before Halving: Approximately $8,700
  • Price One-Year Later: Approximately $55,000

The 2020 halving occurred amid significant macroeconomic uncertainty due to the COVID-19 pandemic. Despite this, Bitcoin’s price followed a familiar pattern, increasing substantially in the months following the halving. By May 2021, Bitcoin had reached new all-time highs, with prices exceeding $60,000.

2024 Bitcoin Halving

  • Date: April 19, 2024
  • Block Reward Reduction: From 6.25 BTC to 3.125 BTC
  • Price Before Halving: Approximately $26,000
  • Current Price: Approximately $64,000 at the time of writing.

On April 13, just one week before the halving event, the price of BTC dropped from over $67,000 to $62,000. At this time, with a block reward of 6.25 BTC, miners were earning roughly $387,500 per block. 

By April 20, the day after the halving, BTC’s price stabilized around $64,000, meaning the new reward of 3.125 BTC was worth approximately $200,000.

Note that the digital asset price saw an All-Time High (ATH) of $73,750 on March 14, 2024, according to CoinMarketCap. However, Bitcoin currently sells at $64,349, a 12.8% slump from its recent ATH. 

Nonetheless, there is positivity in the crypto space that if the bull run continues, BTC could hit the $70,000 mark before the year ends. 

“Bitcoin trading volume generally sees the most significant increase in the 60 days before halvings, as interest builds and prices gain momentum,” — Megan Stals, a market analyst at trading platform Stake.

The Significance of Bitcoin Halving

There are several reasons why Bitcoin halvings are considered by many to be good for Bitcoin’s ecosystem and market value. However, some might not see it as such a good thing. Let’s look at some effects Bitcoin halving may have:

Inflation Control

Bitcoin halving plays a crucial role in managing inflation within the Bitcoin ecosystem. By cutting the rate at which new bitcoins are introduced, halving ensures that the total supply grows at a predictable and decreasing pace. 

This mechanism prevents excessive inflation, which could devalue the currency due to an oversupply of new coins. Unlike fiat currencies, where central banks can print money at will, Bitcoin’s controlled supply model is a key element of its value proposition as “digital gold.” 

For instance, the 2020 halving event lowered Bitcoin’s annual inflation rate from approximately 3.6% to 1.8%, marking a significant step in its deflationary design. 

Likewise, following the April 2024 Bitcoin halving, the digital asset inflation rate dropped to 0.84%, substantially lower than the current US inflation rate of 3.4%, and the annual inflation rate of gold, which ranges between 1% and 3%. 

The halving reduced the block reward from 6.25 BTC to 3.125 BTC, decreasing Bitcoin’s issuance rate. With approximately 450 BTC mined daily, this halving tightens market supply and could potentially increase Bitcoin’s value over time.

Long-Term Economic Sustainability

Halving events also contribute to Bitcoin’s long-term economic sustainability. The system is designed to gradually transition from a high-inflation phase, where miners rely heavily on block rewards, to a low-inflation phase where transaction fees sustain network security.

This gradual reduction in the rate of new Bitcoin creation ensures that the network remains economically viable even as the total supply approaches its cap of 21 million bitcoins, expected to be fully mined by around 2140.

Increases Value 

Each Bitcoin halving reduces the block reward miners receive by 50%, which directly increases Bitcoin’s scarcity. As fewer bitcoins are introduced into circulation over time, this scarcity effect strengthens Bitcoin’s perception as a store of value. 

This artificial scarcity is a key factor in its valuation, echoing the supply and demand principles that drive the value of precious metals. For example, after the 2020 halving, the reduced issuance rate contributed to a significant price surge in late 2020 and early 2021, as investors recognized the increased scarcity and perceived value. 

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The 2024 halving is expected to further enhance Bitcoin’s scarcity, potentially driving its value higher as fewer new bitcoins are mined.

Market Sentiment

Bitcoin halving events are highly anticipated within the crypto community and often generate significant market sentiment. Investors and traders closely watch these events because they have historically been followed by substantial increases in Bitcoin’s price. 

The anticipation of reduced supply can lead to speculative investments and contribute to price volatility both before and after the halving. This psychological impact is a unique aspect of Bitcoin’s market dynamics, influencing both short-term trading and long-term holding strategies.

Network Security and Miner Incentives

While the reduction in block rewards might initially seem detrimental to miners’ revenue, it ultimately encourages more efficient mining operations and technological advancements. As block rewards decrease, miners are incentivized to innovate and find more cost-effective solutions, which can enhance the overall security of the Bitcoin network. 

Additionally, transaction fees, which will increasingly constitute a larger percentage of miners’ revenue, help align miners’ interests with those of network users, maintaining a balance between supply and security.

Potential Risks 

We have looked at the significance and benefits that the Bitcoin the halving event can offer. However, there could also be downsides. 

Bitcoin Network  

Miners—whether individuals, groups, or businesses—engage in Bitcoin mining primarily for its profitability. Despite the fluctuations in Bitcoin’s price over the years, mining has remained a lucrative venture. If it weren’t, the large mining operations wouldn’t continue to thrive.

However, each halving event reduces mining rewards, making the activity less profitable unless Bitcoin’s price increases substantially. To stay competitive, large-scale mining facilities must invest heavily in energy, maintenance, and equipment upgrades. These operations require significant capital to maintain and expand their mining capacity.

For example, Marathon Digital Holdings, one of the world’s largest mining firms, boosted its Bitcoin holdings to 16,930 and expanded its fleet of miners to 231,000 by February 2024. This expansion increased the firm’s hash rate to 28.7 trillion hashes per second, accounting for about 5% of the network’s total hash rate as of May 2024.

This increase in production capacity and holdings was likely driven by anticipation of the April 2024 halving and the need for substantial hashing power to remain competitive, while also ensuring the liquidity needed to sustain operations.

For smaller miners, a decrease in rewards presents a significant challenge. Those participating in mining pools are likely to see diminished returns, even if Bitcoin’s price rises. Since the reward is halved, it’s unlikely that Bitcoin’s price will double without a significant market event, which means smaller miners may face lower chances of profitability.

In extreme cases, this could lead to some miners exiting the network, potentially affecting the security and stability of the Bitcoin blockchain.

Volatility

Bitcoin is known for its price volatility, and the lead-up to and aftermath of halving events can be particularly tumultuous. Prices may fluctuate wildly as investors speculate on the future trajectory of Bitcoin, leading to potential short-term losses.

Market Saturation

As Bitcoin becomes more widely adopted, the market could become saturated with investors, leading to reduced price growth potential compared to previous halvings. Additionally, if new investment products (such as Bitcoin ETFs) provide alternative ways to gain exposure to Bitcoin, demand for the cryptocurrency itself could be diluted.

Recommended reading: Bitcoin Technical Analysis: A Comprehensive Guide

Is it advisable to buy Bitcoin During a Halving?

Many investors place high expectations on Bitcoin halvings, as historically, prices have tended to rise following these events. However, these upward trends have typically unfolded gradually, taking months or even years to materialize, and there is no guarantee that Bitcoin will follow the same pattern in the future. 

Whether you choose to invest in Bitcoin before, during, or after a halving should depend on the market conditions at the time, your personal outlook, and your risk tolerance.

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For example, the most recent halving was distinct in that Spot Bitcoin ETFs were approved by the U.S. Securities and Exchange Commission (SEC) just a few months prior to the event. This led investors and speculators to flock to these new exchange-traded funds (ETFs), with some even reallocating capital from previously popular Bitcoin ETF Trusts.

However, one month after the halving, the market experienced another shift, resulting in a price drop. At the beginning of May, the ETFs saw significant outflows, which were followed by comparable inflows later in the month as market optimism shifted towards Ether ETFs and Bitcoin’s price began to climb.

Given these unpredictable market dynamics, it seems that, at least for now, predicting what the market will do remains a challenge and investors can only make educated guesses.

Recommended reading: Different Types of Crypto Mining Methods

Conclusion

Bitcoin halving is an important event in the crypto space, influencing both the supply and price of Bitcoin. While historical data suggests that halvings often lead to price increases, the outcome is not guaranteed, and various factors will play a role in shaping the post-halving landscape.

However, for those considering investing in Bitcoin, it’s important to conduct thorough research, assess your risk tolerance, and be prepared for the volatility that often accompanies major cryptocurrency events. 

FAQs

What Happens When All Bitcoins Are Mined?

When all Bitcoins have been mined, which is expected to happen around the year 2140, miners will no longer receive block rewards for adding new blocks to the blockchain. Instead, their compensation will come entirely from transaction fees paid by users of the Bitcoin network. 

When Was the Most Recent Bitcoin Halving?

The most recent Bitcoin halving occurred on April 19, 2024, at block height 840,000, reducing the block reward from 6.25 to 3.125.

When is the next Bitcoin halving?

The next Bitcoin halving is anticipated to happen in 2028, at block height 1,050,000. When this event takes place, Bitcoin’s block reward will be reduced to 1.5625 BTC.

Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence before making any trading or investment decisions.