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Bitcoin Halving: What You Need to Know
NEW YORK (AP) — “Miners” who make bitcoin from complex mathematical calculations are taking a 50% pay cut, effectively reducing, once again, new production of the world’s largest cryptocurrency.
Bitcoin’s latest “halving” occurred on Friday evening. Immediately after the highly anticipated event, the price of bitcoin remained stable at around $63,907.
Now all eyes are on what happens down the road. Beyond bitcoin’s long-term price behavior, which is highly dependent on other market conditions, experts point to potential impacts on the daily operations of the asset’s miners themselves. But, as with all in the volatile cryptoversethe future is difficult to predict.
Here’s what you need to know.
WHAT IS BITCOIN HALVING AND WHY IS IT IMPORTANT?
The Bitcoin “halving,” a pre-scheduled event that occurs approximately every four years, impacts bitcoin production. Miners use fleets of noisy, specialized computers to solve complicated mathematical puzzles; and when they complete one, they receive a fixed number of bitcoins as a reward.
The halving does exactly what it sounds like: it cuts your fixed income in half. And when the mining reward decreases, the number of new bitcoins entering the market also decreases. This means that the supply of coins available to meet demand grows more slowly.
The offer is limited one of the main features of bitcoin. Only 21 million bitcoins will exist, and more than 19.5 million of them have already been mined, leaving less than 1.5 million left to draw from.
As long as demand remains the same or increases faster than supply, bitcoin prices should rise as the halving limits production. For this reason, some argue that bitcoin can combat inflation, but experts stress that future earnings are never guaranteed.
HOW OFTEN DOES HALVING OCCUR?
According to Bitcoin’s code, the halving occurs after every 210,000 “blocks” (where transactions are recorded) are created during the mining process.
No calendar date is set in stone, but it divides approximately once every four years.
WILL SIZING HAVE AN INFLUENCE ON THE PRICE OF BITCOIN?
Only time will tell. After each of the previous three halvings, the price of bitcoin was mixed in the first few months and rose significantly higher a year later. But as investors know, past performance is not an indicator of future results.
“I don’t know yet how significant the halving is,” said Adam Morgan McCarthy, research analyst at Kaiko. “The sample size of three (previous halvings) is not big enough to say ‘it’s going to increase 500% again’ or something like that.”
At the time of the last halving in May 2020, for example, the price of bitcoin stood at around $8,602, according to CoinMarketCap, and rose nearly sevenfold to nearly $56,705 by May 2021. Bitcoin prices have nearly quadrupled a year after the July 2016 halving. up nearly 80x in one year compared to Bitcoin’s first halving in November 2012. Experts like McCarthy point out that other bullish market conditions have contributed to such returns.
After a year, the halving on Friday also arrives strong increases for bitcoin. On Friday evening, the price of bitcoin was at $63,907 per CoinMarketCap. This is down from the all-time high of around $73,750 reached last month, but still represents double the price of the asset compared to a year ago.
Much of the credit for bitcoin’s recent rally is given to the early success of a new way to invest in the asset: Spot Bitcoin ETF, which were only approved by US regulators in January. A research report from cryptocurrency fund manager Bitwise found that these spot ETFs, short for exchange-traded funds, saw inflows of $12.1 billion during the first quarter.
Ryan Rasmussen, senior analyst at bitwise crypto research, said persistent o growing demand for ETFsif coupled with the “supply shock” from the upcoming halving, it could help push the price of bitcoin further.
“We would expect the Bitcoin price to have a strong performance over the next 12 months,” he said. Rasmussen notes that he has seen some predict earnings reaching $400,000, but the “consensus estimate” is closer to the $100,000-$175,000 range.
Other experts emphasize caution, pointing to the possibility that gains have already been realized.
In a research note on Wednesday, JPMorgan analysts said they do not expect to see price increases after the halving because the event “has already been priced in” – noting that the market is still overbought according to their analysis of bitcoin futures.
WHAT ABOUT MINERS?
Miners, meanwhile, will have to compensate for the reduction in rewards by keeping operating costs low.
“Even if there is a slight increase in the price of bitcoin, (the halving) can really impact a miner’s ability to pay bills,” said Andrew W. Balthazor, a Miami-based assets lawyer digital at Holland & Knight. “You can’t take it for granted that bitcoin will go to the moon. As a business model, you have to plan for extreme volatility.”
The best-trained miners have probably laid the groundwork early, perhaps by increasing energy efficiency or raising new capital. But cracks may appear for less efficient and struggling companies.
One likely outcome: consolidation. This has become increasingly common in the bitcoin mining industry, particularly following a major cryptocurrency crash in 2022.
In its recent research report, Bitwise found that total miner revenue plummeted one month after each of the previous three halvings. But those figures had risen significantly after a full year, thanks to spikes in bitcoin’s price and larger miners expanding their operations.
Time will tell how mining companies will fare after this latest halving. But Rasmussen is betting that big players will continue to expand and use the industry’s technological advances to make operations more efficient.
AND THE ENVIRONMENT?
Identifying definitive data on the environmental impacts directly linked to the bitcoin halving is still a bit of a question mark. But it’s no secret that cryptocurrency mining consumes a lot of energy overall – and operations that rely on polluting sources have been of particular concern over the years.
Recent research published by the United Nations University and Earth’s Future magazine found that the carbon footprint of bitcoin mining in 2020-2021 in 76 nations was equivalent to emissions from burning 84 billion pounds of coal or from the management of 190 natural gas powered power plants. Coal met the majority of Bitcoin’s electricity demand (45%), followed by natural gas (21%) and hydropower (16%).
Environmental impacts of bitcoin mining they largely boil down to the energy source used. Industry analysts say the push to use cleaner energy has increased in recent years, coinciding with growing calls for climate protection from regulators around the world.
Production pressures could push miners to try to reduce costs. Ahead of the latest halving, JPMorgan warned that some bitcoin mining companies may “seek to diversify into low-energy cost regions” to deploy inefficient mining facilities.