Bitcoin will undergo its fourth halving on April 20, which will occur every 210,000 blocks, reducing the reward from 6.25 BTC to 3.125 BTC. The halving will affect miners' profitability, but it will also make mining operations more efficient and revenue from transaction fees important. The price of Bitcoin moves in four-year cycles, with a sharp increase after each halving. ETF demand and other factors can affect the price of Bitcoin, but the halving embodies a predictable rhythm for the currency. Bitcoin's scarcity and deflationary nature make it a unique asset that is constantly innovating to prepare for the next phase of growth.
Original title: Bitcoin's 4th Halving
Original article by: Tanay Ved & Matías Andrade
Original source: coinmetrics
Translated by: Kate, Mars Finance
Key Takeaways:
•Bitcoin will undergo its fourth halving at block 840,000 (expected on April 20), with the block reward dropping from 6.25 BTC to 3.125 BTC.
•Miners’ profitability will come under pressure as issuance revenue is halved, which will drive mining operations to be more efficient, while revenue based on transaction fees becomes increasingly important.
•Continued or increased demand for Bitcoin could offset forced selling, reducing issuance and driving price action.
introduce
In the current environment of macroeconomic uncertainty, with persistent inflation and a looming Fed Funds rate cut, the ripple effects of the upcoming election cycle, geopolitical tensions and record debt levels, one event stands out as a beacon of certainty – Bitcoin’s fourth halving. With the mining of the first block (the Genesis Block) in 2009, Bitcoin was born as a scarce, decentralized digital currency with a predetermined monetary policy, a predictable inflation rate and a fixed supply of 21 million bitcoins. This week, the Bitcoin network will undergo its fourth halving in its 15 years of existence – an event that is critical to its economic policy and value proposition on the global stage.
In this episode of Coin Metrics’ State of the Network, we take a look at the importance of the Bitcoin halving, its impact on key stakeholders in the ecosystem, and the potential impact on Bitcoin’s price as the fourth Bitcoin halving approaches.
The significance 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 keep the network secure), and can have an impact on Bitcoin’s market value due to increased scarcity.
As the name implies, the halving refers to a 50% reduction in the issuance of Bitcoin, effectively halving Bitcoin's inflation rate (the rate at which new Bitcoins enter the market) in half. With this halving, Bitcoin issuance will drop from 900 Bitcoins per day (1.8% issuance) to 450 Bitcoins per day (0.9% issuance). As a result, the rewards miners receive for validating new blocks and securing the network (excluding fees) are also reduced by half, affecting their incentives and profitability (more on this in the next section). Halvings are set to occur every 210,000 blocks, approximately every 4 years, and are immutable - the rules governing this process are etched into the code that underpins the Bitcoin network.
Source: Coin Metrics Formula Builder
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 in July 2016 (25 BTC to 12.5 BTC), and the most recent in May 2020 (12.5 BTC to 6.25 BTC). The upcoming halving is expected to occur on April 20 at block 840,000 and will further cut the block reward to 3.125 BTC.
Source: Bitcoin Halving Countdown Dashboard
However, as Bitcoin progresses on this schedule, each additional halving will have a smaller and smaller impact on the overall supply as the issuance rate decreases and 19.7 million of the 21 million capped supply has already been mined. Therefore, as Bitcoin approaches its finite supply, the importance of future halvings will gradually diminish.
Mining Economics and Incentives
Miners play an integral role in the Bitcoin ecosystem and are the backbone of the blockchain's security and integrity. They use computing power from specialized hardware to hash transaction data, seeking a nonce (a solution to a hash function) that, when found, validates a new block and adds it to the Bitcoin blockchain. For a deeper understanding of hash functions and nonce, which are the basis of Bitcoin's Proof of Work (PoW), check out our basic questions about hashing.
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 included in the block.
Source: Coin Metrics Network Data Pro
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 a stress test as a large source of income is reduced. As a result, transaction fees are expected to play an increasingly important role in miner income, while the value of Bitcoin will also appreciate amid increased demand.
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 make up a smaller portion of total miner revenue, they have grown in importance with each halving, with total revenue from transaction fees doubling to $2.5 billion since the previous halving.
Source: Coin Metrics Network Data Pro
Total mining revenue continues to reach new heights, with block rewards bringing in more than $76 million in revenue in a single day on March 11, a new all-time high. Although the block subsidy will decrease in Bitcoin terms, the appreciation in Bitcoin’s market value offsets this decrease, resulting in more revenue for miners in USD terms. With Bitcoin performing strongly at the start of the year, miners are hoping that this trend will continue after the halving.
Additionally, Ordinals can engrave data such as images, videos, and text into non-fungible tokens, 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 norms. In fact, in May and December 2023, fee revenue soared to $17 million and $24 million, respectively, accounting for nearly 40% of total miners' fee revenue at the time. With the upcoming launch of "Runes" - fungible tokens on the Bitcoin network - and the halving, miners may see further increases in transaction fee-based revenue, which may offset the impact of the decline in block subsidies.
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 (kWh) at which different ASIC models (application-specific integrated circuits) used in Bitcoin mining can remain profitable.
Source: Coin Metrics Formula Builder
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 led to 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, which is the average industrial 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 strategies such as partnering with renewable energy providers, setting up operations near cheaper and sustainable energy sources, and implementing advanced cooling technologies to utilize stranded energy to improve sustainability and profitability. Those burdened with older, less efficient hardware will find it increasingly challenging to maintain profitable operations, which could lead to the consolidation of mining capacity among the most efficient operators and the gradual phasing out of less efficient ASICs from the network.
This, in turn, could affect the hash rate - a measure of the computing resources allocated to mining. Prior to the halving, Bitcoin's hash rate had grown to 605 EH/s. However, after the halving, the hash rate typically drops temporarily as less efficient hardware goes offline. In order to maintain the 10-minute target block time, the drop in hash rate could lead to a downward adjustment in Bitcoin's difficulty, easing the hashing process under changing conditions.
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 asset with inelastic supply such as Bitcoin. The launch of a spot Bitcoin ETF in January catalyzed a large amount of new demand, changing the Bitcoin market dynamics compared to previous halving cycles. Continued inflows into the U.S. and recently approved Bitcoin exchange-traded products in Hong Kong, 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 effectively.
Price Dynamics
As with every halving, a core 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, they may not be a direct indication of future outcomes. Given that we have only experienced halvings three times before, under different market conditions and with different investor contexts, predicting whether or not it is already priced in can be misleading, despite it being a well-known event in advance.
Source: Coin Metrics Reference Rates
The price of Bitcoin tends to move in four-year cycles. If we look back at each halving period, the price of Bitcoin has risen significantly in the year following each halving event. Before the first halving in 2012, Bitcoin saw returns 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. In the current era before the fourth halving, as of April 15, we have seen a 664% appreciation, with BTC reaching an all-time high of $73,000 before the first halving.
The demand sparked by ETFs, and the subsequent attention, has led to a slightly different dynamic and promises to play a larger role in the future. Several 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 could affect Bitcoin’s price trajectory.
Source: Coin Metrics Reference Rates
The historical decline chart above illustrates the resilience of Bitcoin’s price trajectory. Despite consistent corrections of more than 70% from all-time highs during the halving cycle, prices have rebounded and set new highs at the beginning of each cycle. As the fourth halving approaches — despite Bitcoin reaching new all-time highs even before the halving — it is important to consider price volatility, which can be caused by external conditions or increased attention and speculation on the halving itself.
in conclusion
The Bitcoin halving embodies a predictable monetary rhythm in an uncertain financial environment. Bitcoin’s inherent scarcity and deflationary nature make it a unique asset in various economic cycles. While the reduction in block rewards will put pressure on miners, it will 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 innovation in Bitcoin - like the upcoming Runes and Bitcoin L2, improving transaction fees and scalability, Bitcoin is ready for the next era.
To stay up to date with Bitcoin mining dynamics, ASIC dominance, and the live countdown to Bitcoin’s fourth halving, head to our Bitcoin Mining Dashboard .
Network Data Insights
Source: Coin Metrics Network Data Pro
Bitcoin’s active addresses fell 10%, while Ethereum ’s active addresses remained unchanged on a week-over-week basis. Uniswap received a Wells Notice from the SEC and saw its market cap drop 19% despite an increase in trading volume.
