Bitcoin Halving Overview
The transparency and predictability of Bitcoin issuance are key features that distinguish this asset from any other asset or currency in the world. No other asset has a calculable inflation schedule and a foreseeable supply event that reduces daily issuance by 50% overnight. Bitcoin’s anonymous creator, Satoshi Nakamoto, programmed the Bitcoin halving feature as a countermeasure to the continued debasement of fiat currencies.
“The fundamental problem with traditional currencies is all the trust required for them to work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is littered with violations of that trust.” - Satoshi Nakamoto, February 11, 2009
On April 20, 2024, Bitcoin will undergo its fourth halving at block number 840,000. During each halving event, the block reward (also known as the "block subsidy") (representing the number of newly issued Bitcoins paid to miners for each mined block) is reduced by half. Bitcoin's block reward after the fourth halving will drop from 6.25 BTC to 3.125 BTC (equivalent to a reduction from about 900 BTC to about 450 BTC per day). As a result, Bitcoin's annualized issuance rate will drop from about 1.7% to about 0.85%. According to Coin Metrics, by the time of the fourth halving, 93.7% of the total Bitcoin supply will enter circulation.
Halving occurs every 210,000 blocks (approximately every 4 years), and after Bitcoin's fourth halving, the network will experience 30 more halvings. Halvings are expected to occur until the last Bitcoin is finally mined, which is expected to occur sometime after 2140. Once all Bitcoins are mined and in circulation, miners will no longer receive block subsidies and will rely entirely on transaction fees and other forms of off-chain payments.
Bitcoin's scheduled issuance reductions approximately every 4 years are the backbone of its transparent, predictable monetary policy and make Bitcoin a provably scarce asset. Most importantly, Bitcoin's monetary policy is an immutable code executed by consensus among network stakeholders (miners, nodes, developers). Bitcoin's scarcity and the predictability of its monetary policy contrast with the significant devaluation of the world's fiat currencies, which has earned Bitcoin the well-known nickname of "digital gold."
Visualizing the Bitcoin Core Halving
Bitcoin Core is the open-source software created by Satoshi Nakamoto that forms the foundation for the Bitcoin protocol. Bitcoin Core is considered by developers to be the primary reference implementation of Bitcoin (although other software implementations are compatible with the network). As such, all functionality and logic that defines Bitcoin resides in Bitcoin Core.
The code in Bitcoin Core that forces the halving consists of 7 lines of code written in C++. Breaking down the code line by line is beyond the scope of this report, however, it is important to visualize the code responsible for determining the block reward at the current block height:
Line 1240: Count how many halvings there have been.
Lines 1245 – 1248: Determine the miner’s block reward.
Learn about Bitcoin Mining
Mining is a key component of the Bitcoin network. When a person wants to send Bitcoin to another wallet, the transaction is first broadcast to the network and checked for validity by nodes. Before being added to a block, the transaction exists in a queue state within the "mempool", a pool of transactions that are unconfirmed and waiting for miners to include them in a block. The block subsidy is both a means of incentivizing miners to contribute computing power to the network to process and settle transactions, and a method of allocating the supply of newly minted Bitcoins. As the price of Bitcoin rises, the incentive to mine blocks to receive these rewards also increases significantly.
Miners produce blocks by calculating the correct hash of the next block. With this advantage, the miner with the highest hash rate, or computing power from an application-specific integrated circuit (ASIC) machine, will have the highest probability of finding the hash of the next block. The first miner to calculate the correct hash will receive the block subsidy and the transaction fees in the block. Typically, the time to calculate the correct hash is about 10 minutes (Bitcoin's block time). The network guarantees miners that the block time is always around 10 minutes through difficulty adjustments. These adjustments are made every 2016 blocks (approximately every two weeks) as the network hash rate increases or decreases. The greater the computing power, the more difficult it is to mine a block. Therefore, difficulty adjustments enforce consistent block production and Bitcoin's monetary policy.
By convention, the first transaction in a block is a special transaction that starts new coins owned by the creator of that block. This increases the incentive for nodes to support the network and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant number of new coins is analogous to a gold miner consuming resources to add gold to circulation. In our case, the consumption is CPU time and electricity. " - Satoshi Nakamoto, Bitcoin Whitepaper, October 31, 2008
The impact of halving on Bitcoin mining
Bitcoin miner rewards are made up of block subsidies and transaction fees. During the halving, Bitcoin's block subsidy will be halved from 6.25 BTC to 3.125 BTC. Keeping the Bitcoin price and network computing power unchanged, this will cause Bitcoin miners' income to be almost halved, as the block subsidy currently accounts for the majority of the total reward.
For miners, this means that the same amount of computing power will produce roughly half of what it did before the halving event. Therefore, after the halving, the cost of mining a single Bitcoin is expected to roughly double, making it unprofitable for less efficient miners, who will be forced to cease operations. As a result, the network hashrate is expected to decline in the short term. Hashrate means the total computing power that miners contribute to Bitcoin. The severity of the decline in network hashrate depends on factors such as Bitcoin price and transaction fees at the time of the halving.
The table below outlines the estimated cost of mining one Bitcoin with various commonly used ASICs (listed from least efficient to most efficient) under different post-halving electricity cost scenarios. These calculations assume a network hashrate of 625 EH and transaction fees of 10% of the block reward.
In preparation for the halving, miners have been working to improve operational efficiency by reducing costs and upgrading equipment. Many miners have announced large ASIC purchase orders and strategic site acquisitions to position themselves well ahead of the halving. As highlighted in the table above, at an electricity cost of $50/MWh, the S21 is 50% cheaper to mine than the S19, illustrating the importance of improving fleet efficiency.
Miners have already increased their cash reserves ahead of the halving, maintaining large cash reserves as “dry powder” to take advantage of discounted infrastructure purchases in the event of a potential increase in Bitcoin prices. M&A activity is expected to surge after the halving as assets are transferred to more efficient operators, consolidating the industry landscape and driving further optimization.
Overall, the upcoming Bitcoin halving is a critical moment for miners. As the industry prepares to significantly reduce block rewards, miners face an urgent need to adapt and innovate in order to remain profitable and sustainable in a changing environment.
The impact of halving on Bitcoin price
The impact of the halving on Bitcoin price is an ongoing debate that occurs with every halving. While historically, market participants view the halving as a bullish event for Bitcoin price, opposing views suggest that the impact of the halving on price is negligible. Below is a breakdown of the market’s current bullish, bearish, and neutral views on the impact of the halving on BTC price.
Bullish view: The 50% reduction in Bitcoin block rewards makes Bitcoin more scarce as an asset overall while reducing the absolute amount of miner selling. Miners have always been considered forced sellers of Bitcoin because these operations are capital intensive and Bitcoin sales are the main source of income for miners. As a result, miners always sell part of their block rewards for fiat currency to pay for operating expenses such as energy, labor, debt, and new machines. Many believe that the reduction in supply growth corresponding to the reduction in selling pressure from the mining community led to an increase in the value of Bitcoin after the November 2012, July 2016, and May 2020 halvings, and that the same may happen after the fourth halving. Market participants who view the halving as bullish sentiment for price also use the widely circulated stock-to-flow model to quantify the impact of Bitcoin's supply reduction on price. Proponents of this view generally believe that investors are not properly factoring in the halving in the current Bitcoin valuation.
Bearish View: With Bitcoin prices approaching all-time highs for the first time in history, market participants who view the halving as bearish for Bitcoin prices believe that the market has already adjusted to the first three halvings and has already priced in this event. Prior to the two most recent halvings, BTC was down more than 42% from its previous all-time high. In fact, at this stage in Bitcoin’s supply schedule, the bull runs of 2017 and 2020 have not yet begun. The impact of each halving on Bitcoin’s supply dynamics is bound to be reduced by half, and the impact will decline over time. For example, in absolute terms, a reduction from 900 BTC per day to 450 BTC per day is much smaller than a reduction from 7,200 BTC per day to 3,600 BTC per day (the first halving). Considering that Bitcoin’s current daily issuance of 900 BTC is negligible compared to the daily circulation of the asset, the impact of an additional 450 BTC per day after the halving will be minimal on BTC prices. In addition, bears believe that the reduction in miner income could lead to disruptions in the mining industry and make the Bitcoin network less secure.
Neutral view: The efficient market hypothesis suggests that past and future Bitcoin halvings are contrary to "new information" and cannot be considered supply shocks. Bitcoin's transparent and predictable issuance schedule should always be reflected in the market. The bull market after the halving may be more related to changes in demand than changes in supply, and may even be more related to factors such as global market liquidity, central bank interest rates and other macro conditions.
Historically, Bitcoin enters a bull run during the post-halving hype phase, which lasts from 0 to 600 days. After the first halving in 2012 (cycle 1), Bitcoin price reached the cycle top 367 days after the halving. During the second halving in 2016 (cycle 2), price discovery after the halving was slower and reached the cycle top 525 days after the halving. The third halving in 2020 (cycle 3) reached the cycle top 546 days after the halving.
If history repeats itself, we are currently at the end of the accumulation phase and will slowly enter the hype phase sometime in 2024.
For the first time in history, the price of Bitcoin has broken through its all-time high before the halving. During the previous two halvings of Bitcoin in 2016 and 2020, the price of Bitcoin fell 42.5% and 52.8% from its previous all-time highs, respectively. While the strong price action before the halving of Bitcoin can be seen as the market leading up to the hype phase we typically see after the halving, the driving force behind the price of Bitcoin in this cycle is new developments that did not exist in previous halving cycles, especially the launch of a spot-based Bitcoin ETF in the United States in January 2023.
Bitcoin’s fourth halving will occur at a time of major paradigm shift for the asset following the launch of spot Bitcoin ETFs. BTC spot ETFs have seen cumulative net inflows of over $12.5 billion since the ETF’s launch on January 10, 2024. Bitcoin has re-emerged at the forefront of macro investor discussions and is now viewed as a key macro hedge asset alongside gold and Treasuries. The advent of a Bitcoin ETF in the U.S. represents a seismic shift that will upend conventional wisdom regarding Bitcoin price cycles, evaluation of holder behavior, and rotation dynamics within the cryptocurrency.
Block activity halved
Block number 840,000, also known as the halving block, will be a block with high demand for transactions to be included due to its historical significance and rarity. Halvings occur only every 210,000 blocks, and there will only be 34 halving blocks in the existence of Bitcoin, which may lead to fierce competition among users and miners to conduct transactions or mine blocks within this block.
The core factors driving transaction fees skyrocketing during the halving include the launch of a new fungible token standard called Runes, and rare sat hunting. Runes are a new fungible token standard for Bitcoin that is more efficient than the BRC-20 token standard. Runes will be launched on the halving block, and large collections of Rune tokens are expected to pay high transaction fee rates to ensure their inclusion in that block. To learn more about Runes, we will cover the new fungible token standard in more detail in the Galaxy Research newsletter. For reference, sats are the smallest unit of Bitcoin - one Bitcoin is divisible by 100 million sats. Rare sats are a new collectible asset on Bitcoin that are created when Ordinals emerge in December 2023. Rare sat collecting requires purchasing sats that were mined in blocks of historical significance, such as the halving block or the block mined by Satoshi Nakamoto (block 9). Every sat in block 840,000 will have significant historical value, and as such, rare sat hunters will charge high fees on their transactions to ensure block inclusion.
Another potential factor driving up transaction fees during the halving is if mining pools attempt to reorganize (re-organize) Bitcoin’s historical blockchain state. A reorganization occurs when an alternative version of the blockchain gains consensus among nodes, effectively rewriting a portion of the blockchain’s transaction history. While the chances of a successful reorganization are slim, mining pools may attempt to reorganize the chain in order to successfully capture high-fee blocks. It is worth noting that mining pools that attempt to reorganize the chain but are unsuccessful will still drive up transaction fees because the hashrate used to reorganize the chain is being diverted away from the longest chain tip. This will slow down block times and cause fees to naturally increase as mempool pressure has more time to accumulate.
Why the halving matters
Halving is a manifestation of Bitcoin's transparent, predictable, deflationary monetary policy. Halving events reinforce Bitcoin's fundamental value proposition, including its open peer-to-peer network, competitive mining, decentralized node network, and active open source development community. Halving itself is the mechanism that distinguishes Bitcoin from other assets in terms of scarcity.
Bitcoin's immutable monetary policy coupled with a 21 million hard cap is a revolutionary concept for a macro asset. The transparency of Bitcoin's daily issuance schedule allows anyone in the world with a computer to verify for themselves that Bitcoin issuance is proceeding as planned, without having to rely on or trust intermediaries. In addition, every node in the Bitcoin network can confirm that the 21 million hard cap supply remains intact.
The predictability and transparency of Bitcoin’s fixed supply make this emerging asset a viable alternative store of value to fiat currencies. Unlike Bitcoin’s fixed supply, fiat currencies are subject to the discretionary actions of central banks, which have the power to adjust the money supply to manage economic stability or stimulate growth. This discretion results in an unrestricted total supply of all fiat currencies and an unpredictable issuance schedule. The impact of this unpredictability is clear when evaluating central bank behavior. In response to the global economic turmoil caused by the COVID-19 pandemic, the Federal Reserve printed $5 trillion out of thin air, more than doubling the central bank’s balance sheet. This money printing, along with the U.S. government’s fiscal spending, permeated the U.S. economy, helping to mitigate the negative impact of lockdowns and COVID-19 measures and stimulate the economy, but ultimately led to the worst inflation in decades. Even gold, hailed as the oldest scarce monetary asset, lacks a clear total supply, and its production, while influenced by market dynamics rather than central bank policy decisions, remains unpredictable.
Bitcoin’s resilience throughout numerous bear markets highlights the rekindling of its value in the broader market as a decentralized macro asset with transparency, predictability, and scarcity. Bitcoin’s monetary policy is fixed, and each halving reaffirms its longevity. Halvings will continue to occur, and stakeholders will never be bailed out by the system. The halving, which is expected to occur on April 20, 2024, will reinforce these facts and will remind the market of Bitcoin’s unique properties.
“If you don’t believe me or don’t understand, I don’t have time to try to convince you, sorry.” - Satoshi Nakamoto, July 29, 2010
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