Bitcoin's fourth halving and its impact

Key points:

• Bitcoin is expected to experience its fourth halving on April 20 (block height 840,000), when the block reward will drop from 6.25 BTC to 3.125 BTC.

• As issuance revenue is halved, miner profitability will come under pressure, which will promote more efficient mining operations, while transaction fee revenue sources will become increasingly important.

• Continued increase in demand for Bitcoin could offset selling pressure, as well as reduced issuance, driving price action.

1. Introduction

In the current environment of macroeconomic uncertainty—persistent inflation and a looming Fed Funds rate cut, impending election-related ripple effects, geopolitical tensions, and record debt levels—one thing is certain: Bitcoin’s fourth halving. With the mining of the first block (the genesis block) in 2009, Bitcoin was created as a scarce, decentralized digital currency with a predetermined monetary policy, a predictable inflation rate, and a fixed supply of 21 million BTC. This week, the Bitcoin network will undergo its fourth halving in its 15-year history—an event that is critical to its economic policy and global value proposition.

In this article, we take a look at the significance of Bitcoin halving, its impact on key stakeholders in the ecosystem, and what impact the BTC price will have as the fourth Bitcoin halving approaches.

2. The importance of “halving”

Each halving event is a critical moment in Bitcoin’s lifecycle as it directly affects Bitcoin’s issuance and inflation rate, reduces block rewards (newly issued Bitcoins that incentivize miners to produce blocks and maintain network security), and can have an impact on BTC’s market value due to greater scarcity.

As the name implies, the halving is when the number of bitcoins issued is cut in half, 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, the rewards miners receive for validating new blocks and securing the network (excluding fees) will also be cut in half, affecting their incentive levels and profitability. Halvings are set to occur every 210,000 blocks, or about every four years, and are immutable - the rules governing this process are written into the underlying code of the bitcoin network.

Bitcoin's monetary policy is shown in the figure above. Since its inception in 2009, the network has undergone three halving events, each of which cut the block reward for miners in half. 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 will further cut the block reward to 3.125 BTC.

However, as Bitcoin continues to evolve on this schedule, each new halving will have a smaller and smaller impact on overall supply as the issuance rate decreases and 19.7 million of the 21 million supply cap has already been mined. Therefore, as Bitcoin approaches the cap on its finite supply, the importance of future halvings will gradually diminish.

3. Miner economics and incentives

Miners are an indispensable role in the Bitcoin ecosystem and the backbone of blockchain security and integrity. They use the computing power of specialized hardware to hash transaction data and seek a nonce - a solution to a hash function. Once a nonce is found, a new block is verified and added to the Bitcoin blockchain.

In return for their computational work, miners receive a block reward (block subsidy), which consists of a predetermined number of newly minted bitcoins and transaction fees from the transactions included in the block.

The block subsidy is the main economic incentive for miners. However, with this reward cut from 6.25 BTC to 3.125 BTC, miners will face pressure as a large source of income is reduced. Transaction fees are expected to become increasingly important to miners' income, and, with a large increase in demand, the value of Bitcoin will also appreciate.

Since the third halving, Bitcoin revenue from block subsidies has climbed to $43 billion, 180% higher than the previous halving in 2016. While transaction fees currently account for a small portion of miners’ total revenue, they are becoming more important with each halving, with total revenue from transaction fees doubling to $2.5 billion since the previous halving.

Total mining revenue continues to hit new highs, with block rewards exceeding $76 million on March 11 alone, a record high. Although the block subsidy will decrease in BTC terms, the rise in Bitcoin's market value offsets this decrease, resulting in more USD-denominated revenue for miners. With Bitcoin's strong performance at the beginning of the year, miners hope 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 in transaction fees per day, far higher than historical standards. In fact, in May and December 2023, transaction fee revenue 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" (alternative tokens on the Bitcoin network) accompanying the halving event, miners can expect to see further increases in transaction fee revenue, offsetting the impact of the decline in block subsidies.

4. Mining profitability and efficiency

The profitability of mining is intricately 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 breakeven power consumption chart provided below, which reflects the maximum electricity cost (in kilowatt-hours) that different ASIC models (application-specific integrated circuits) used in Bitcoin mining can maintain profitability.

Newer ASIC models, such as the Antminer S19 and S19 XP, are profitable at electricity costs below $0.13/kWh and $0.20/kWh, respectively, compared to older models such as the S9 and S17. This is because technological advances in ASIC design have resulted in more energy-efficient miners, allowing for profitable mining operations at higher electricity rates. However, this metric will be cut in half, making these models unprofitable even at $0.08/kWh (the average industrial electricity rate in the United States). With the fourth Bitcoin halving approaching, miners with the most efficient hardware and the cheapest electricity will be better able to withstand the reduction in block rewards.

As a result, mining companies have been adopting various strategies such as partnering with renewable energy providers, setting up operations near cheaper sustainable energy sources, and implementing advanced cooling technologies to utilize idle energy to improve sustainability and profitability. Those with older, less efficient hardware will find it increasingly difficult to maintain profitable operations, which may 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 could affect the hash rate - a measure of computing resources allocated to mining. Before the halving, Bitcoin's hash rate had grown to 605 EH/s. However, after the halving, the hash rate usually drops temporarily as less efficient hardware goes offline. In order to maintain the target block time of 10 minutes, the decline in hash rate may lead to a downward adjustment in Bitcoin's difficulty, thereby easing the hashing process under the changing environment.

5. Impact of demand drivers

While the halving is a supply-side event, the weakening impact of issuance shows that demand plays a crucial role in driving the market value of an inelastic supply asset like Bitcoin. The launch of the spot Bitcoin ETF in January has generated a large amount of new demand, changing the Bitcoin market dynamics compared to previous halving cycles. Continued inflows into the US and recently approved Hong Kong BTC exchange-traded products, as well as other sources of demand ranging from funds to public company balance sheet holdings and smart contracts, will help absorb pressure from forced selling and new issuance supply more efficiently.

6. Price dynamics

As with every halving, the big question on everyone’s mind is: 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 will hold. Given that we have only experienced halvings three times before (although it is a well-known event) under different market conditions and with different investors, predicting whether the halving will affect the price can be misleading.

The price of Bitcoin tends to move in four-year cycles. 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 saw a return of over 14,000%. After the first and second halvings, the price of Bitcoin increased by 5,100% and 1,200%, respectively, ultimately reaching an all-time high about 500 days after the halving. Today, before the fourth halving, as of April 15, we have witnessed a 664% appreciation, with BTC reaching its first all-time high of $73,000 before the halving.

The demand triggered by ETFs, and the subsequent attention, has led to a slightly different dynamic and is expected to play a larger role in the future. Other factors may also drive growth on the demand side, such as broader macroeconomic and liquidity changes, regulatory changes, growth in global digital asset adoption, and speculative behavior, all of which may affect Bitcoin's price action.

The historical decline chart above shows the resilience of Bitcoin’s price trajectory. Despite a consistent correction of more than 70% from its all-time highs during the halving cycle, it rebounded to new highs at the beginning of each cycle. As the fourth halving approaches — despite BTC reaching new all-time highs even before the halving — it is important to consider price volatility that could arise from external conditions or increased attention and speculation on the halving.

7. Conclusion

The Bitcoin halving represents a predictable monetary rhythm in an uncertain financial environment. Bitcoin's inherent scarcity and deflationary nature make it a unique asset in economic cycles. While the reduction in block rewards will put pressure on miners, it will also push them towards more efficient and sustainable operations. The confluence of this supply-side event and strong demand drivers shows that Bitcoin is ready for the next phase of growth. With no shortage of innovations, such as the upcoming Runes and Bitcoin L2s, improvements in transaction fees and scalability, Bitcoin is ready for the next era.