A Bitcoin halving is an event at which the reward for mining new blocks is split into half, causing miners to get 50% fewer bitcoins than they previously had.
A block is produced every 10 minutes, and a certain amount of bitcoins are rewarded to the miners. Initially, when Bitcoin began, miners received 50 BTC as a reward. Now, they share only 6.25 BTC for every new block.
Halving occurs after 210,000 blocks are mined — about every 4 years — after which the block rewards are halved and will keep on halving until the block reward becomes zero, approximately by the year 2140.
What happens when Bitcoin halves?
A Bitcoin halving event normally grabs the attention of many people because they believe that it may lead to a price increase. But the fact remains that no one ultimately knows what will really happen.
Miners play a major role in Bitcoin halving. They are responsible for mining new blocks, aiding transactions, and upkeeping the overall network. The speed and security of the network depends on the hashrate, which is the computational capacity of the network.
Bitcoin creator Satoshi Nakamoto created the Difficulty Adjustment Algorithm (DAA) to increase or decrease the mining difficulty depending on the network’s hashing power. The DAA drops or increases every two weeks on average.
Read Also: Bitcoin Price Outlook After Historic Halving
Bitcoin Mining and Deflation
In blockchain and cryptocurrency terms, mining is a process in which nodes, also called miners, use mining equipment to solve complex mathematical problems to chain together blocks of transactions. As a reward, they receive the network’s native cryptocurrency.
Bitcoin has a 21 million total supply, which makes it a deflationary asset.
All Bitcoin transactions will normally get queued up in a place called the “mempool”. The miners then pick up these transactions and create their block. Once the block fulfills a certain requirement, then it will be added to the Bitcoin blockchain.
Mining is extremely resource-intensive. It normally requires lots of electricity and money.
The block reward will normally entice the miners to participate in mining. If there is no Bitcoin halving, then the miners could have mined away all the Bitcoins in the world, totally skewing the overall supply-demand equation.
Supply and Demand
The supply-demand equation means that in any given competitive market, all are equal until the price of a particular product reaches economic imbalance.
This may lead to two situations: firstly, the price of the asset/product will decrease when the supply is high and the demand is low. Secondly, it will increase when the supply is low and the demand is high.
If miners mine Bitcoins easily, this will exponentially increase the circulating supply, crashing its price in the process. That is the reason Bitcoin halving was hard-coded into the protocol for monitoring the circulating supply.
Bitcoin’s halving schedule
The first Bitcoin halving occurred on Nov 28, 2012, when the network reached its first 210,000 blocks. The event was preceded by organized trading parties hosted by various miners from across the globe.
Before the first Bitcoin halving, miners got 50 bitcoins per block. After that event, the block reward was cut down to 25 bitcoins per block.
The second Bitcoin halving happened on July 9, 2016, but a month before the event the anticipation peaked, which resulted in a sell-off by some investors. After the second Bitcoin halving, miners got 12.5 Bitcoins per block.
The third Bitcoin halving was expected to happen on May 12, 2020, but due to the network speed, it happened on May 11. Then after which the Bitcoin miners got 6.25 Bitcoins per block.
How have halvings affected the price of BTC?
As history suggests, Bitcoin halving has a positive effect on the long-term on the price of Bitcoin.
For example, an average of 4,380 blocks are mined each month and added to the Bitcoin blockchain. As of this writing, the block reward is 6.25 BTC with a price of $10,000, which will be used for this example.
Therefore, miners will be earning approximately 4,380 x 6.25 x 10,000 = $273,750,000 per month in total revenue. After the next Bitcoin halving, only half of as many BTC will be generated per day, which will be approximately 4,380 x 3.125 x 10,000 = $136,875,000 per month.
When this occurs, miners will either give up or refuse to sell bitcoins, which is generated at a price below $10,000 as per the example. In some cases, it ends up with a mix of both.
BTC price after halving
During the first halving event, the price of Bitcoin has increased by over 200x. This increase started almost six months before the event and then continued for another 12 months. The price then fell by 84% over the next 14 months.
Meanwhile, the bull run around the second halving started two months prior and then continued for another 19 months, which has produced a total price gain of over 4,000%.
By early 2017, Bitcoin’s price had reached $1,000. But by the end of the year, it skyrocketed to $20,000. Then again Bitcoin price decreased, at the start of 2019 it was $3,000, then the price of Bitcoin again increased in anticipation of the third Bitcoin halving.
After the third halving, Bitcoin has started to increase again, with a price of $11,962.63 at the time of writing.
BTC average trade volume
In 2012, over two months before the first Bitcoin halving, the average daily trading volumes increased by 50% until May of the following year.
In 2016, before the second Bitcoin halving, the average trading volumes will have grown by 150% over the month. During the Bitcoin halving month of July, they then fell by 30 percent and continued to decline for three months.
Why does halving matter?
Bitcoin halving matters to the whole crypto community, not just investors. Historical data shows that Bitcoin rallied sharply following the previous three halvings. Many investors are also optimistic that the 2024 Bitcoin halving will have the same effect.
Bitcoin creator Satoshi Nakamoto came up with an ingenious solution to maintain the security of the network by offering incentives to those who will contribute to its stability.
With one person controlling the compensation to the network maintainers, the network could not be truly decentralized. Satoshi’s solution embeds the compensation in the protocol itself.
Bitcoin miners receive their reward from the program, with no central authority involved.
The ingenious mechanism of Bitcoin is that the miners are encouraged to work toward the network instead of hijacking it, simply because they are only paid a good amount if there the network is secured.
Any attack will require the control of 51 percent of the network’s processing power. If a miner wants to double-spend or change an already-done transaction, he would need to increase his computing power.
Massive amounts of computing power is expended in order to recalculate subsequent hashes and fight off miners to maintain the correct chain. This would be costly even at reduced energy rates.
In other words, Bitcoin’s ingenious incentive mechanism has been designed in such a way that it would be more costly to attack the system than it is to maintain it and be incentivized for doing so.
Miners normally choose to join the mining pools in order to improve competitiveness and also to simplify management. Others have raised concerns that the resulting concentration of mining activity may encourage collusion.
Recent developments show that mining power is generally becoming less concentrated over time as more miners are entering the sector. In May 2016, the four largest mining pools which are based in China held almost 75% of the network’s hashing power.
Electricity is 40 percent cheaper per household in China than in the US. Costs are even cheaper in Middle Eastern countries such as Iran, Qatar, and Iraq. This could imply that mining operations located in the US are more likely to shut down.
The concentration of bitcoin mining in China does present a small but real security threat to the Bitcoin network. Theoretically, the Chinese government could force mass shutdowns of mining pool operators F2Pool, Poolin and Bitmain, which are all located in the country.
These three operators are responsible for about 55 percent of network hash power. The sudden shutdown of their operations could disrupt the network on a massive scale.
The graph below shows the percentage of concentration on the most popular bitcoin mining pools.
(Note: this is only a rough estimate.)
How do Bitcoin miners stay profitable?
Bitcoin miners will have a major role during the Bitcoin halving. There are many steps that miners take in order to remain profitable:
➢ Energy-efficient hardware such as the Dragonmint T16 and the Antminer S9 are preferred by the miners. These ASICs will provide a huge processing power with the power consumption low.
➢ Some set up their operations in regions with cold weather and cheap electricity.
➢ Other countries have access to alternative sources of electricity which are cheaper and efficient. One popular example is the installation of solar panels.
In 2019, Bitcoin mining has produced $5 billion in revenue. This represents a 26% decrease. But between 2017 and 2018, the revenues have increased by almost 65%. This shows that the demand for mining will increase, even though growth will remain volatile.
Miners’ collective revenue normally oscillated between $7.89 million and $28.60 million over the past 52 weeks, as per data from Blockchain.com. Revenue from mining activities comes from two main sources: block subsidy and transaction fees.
Block subsidy consists of newly-generated coins and is the biggest part of a block reward. Miners usually get allocated a fixed number of bitcoins on each block. The protocol cuts this number in half after every four years.
The 50% reduction in block subsidy will not mean that the miner’s revenue is cut in half, because that 50% refers only to the number of bitcoins allocated; the Bitcoin value is still measured in fiat currency. Technically speaking, if Bitcoin doubles in price, then the miners did not lose out.
Each transaction included in a block will contain fees. For example, the average transaction fee between December 2017 and January 2018 spiked up to $54. This happens because when the demand goes up, the number of transactions getting queued up also spikes as well.
Since the beginning of 2019, BItcoin transaction fees have amounted to an average of 0.012% of transactions that happen in US dollars. For network security, the transaction fees are not essential because the bulk of the miners’ compensation will normally come from the block rewards.
Read Also: Why Do Bitcoins Have Value?
In early 2020, researchers predicted that the mining cost of Bitcoin will be around $12,000 to $15,000 after the third Bitcoin halving. But it was not the case since it was cheaper to mine Bitcoin than it was estimated initially.
Many computer manufacturing companies have designed Application-Specific Integrated Circuits (ASICs) for mining Bitcoins at breakneck speed. It offers increasing hashing power, which reduces the compensation of electricity compared to all previous technologies.
In addition to a Bitcoin mining ASIC, there are also some other Bitcoin mining equipment being used by many today:
➢ Power Supply – Special power supplies are required by Bitcoin rigs to funnel and use electricity efficiently.
➢ Cooling Fans – Bitcoin mining hardware can overheat easily and stop working. As such, it is necessary to buy a sufficient amount of cooling fans in order to keep the hardware working.
➢ Backup generators – If the main source of the electricity goes down, generators can be used as backups.
Bitcoin mining will generally involve a stream of hashing attempts, and the speed at which the hash function will run is called the hashrate.
In miner economics, hashrate matters because if the speed of a computer is faster, then the number of attempts to produce a hash will be greater. This satisfies the established criteria that is necessary to add a block to the blockchain.
The hashrate is measured in hashes per second (h/s). For convenience, most data sources track tera-hashes, which means trillion hashes per second (TH/s), peta-hashes which is a quadrillion hashes per second (PH/s) or exa-hashes, equivalent to a quintillion hashes per second (EH/s).
Bitcoin’s hashrate usually reaches around a trillion hashes per second (TH/s), which can be easily handled by most personal computers. Nowadays, sophisticated ASIC will produce hashrates of as much as 110 TH/s.
Note: The hashrates provided from the above data are not calculated directly from the mining machines. Rather, it is the ratio of the number of blocks found to the expected number of blocks, multiplied by the difficulty rate.
The cost of mining a Bitcoin is cheaper than it has been estimated after the third halving. The Cambridge Centre for Alternative Finance1 has estimated an index of Bitcoin electricity consumption.
The hashrate, the average cost of electricity, mining equipment efficiency, data center efficiency, and miner revenue are taken into account for the estimation.
Please see the below figure for a rough estimate of Bitcoin mining profits.
According to many Chinese miners based in Sichuan, the electricity in the region is around $0.04 per kilowatt-hour.
These miners said that with the rate of $0.04/kwh, the breakeven cost for mining Bitcoin hovers in the range of $5,000 to $6,000. Commercial mining equipment like the Antminer S9 which is run by the individual miners operates at a cost of $8,206.
Given these figures, BTC miners will have more incentive to sell in order to cover the operational costs instead of holding onto the BTC they were mining.