The upcoming Bitcoin halving

Pro tip, if you’re ever at a networking event and want to quickly tell if someone is passionately into Bitcoin, ask them the significance of the following three dates: 28 November 2012, 9 July 2016, and 11 May 2020.

If they stare at you blankly and begin to edge away from you, or vaguely mention something about their cat’s birthday, chances are they probably aren’t that into crypto. But if their eyes light up, a smile spreads across their face, and they start excitedly telling you about halving events, mining rewards, bull runs, HODLing, ATHs, and the genius of Satoshi, you’ll know you’ve found a passionate Bitcoiner.

These are the dates of the previous Bitcoin halving events.

The halving event is one of the most important events in the Bitcoin calendar. It happens every 4 years and has historically preceded every single major Bitcoin bull run since Bitcoin was created. The next halving event is due to occur in April this year.

Transactions, blocks, block rewards, and miners

To understand what the halving is, and why it matters, we need to quickly look at the Bitcoin ecosystem: transactions, blocks, block rewards, and miners.

Sending Bitcoin to another address on the blockchain is a transaction. When you first submit this transaction, it's unconfirmed by the Bitcoin network, i.e. your transaction is pending. In order for your pending transaction to complete, it needs to be added to a group of other currently pending transactions from other Bitcoin users, and this whole group needs to be confirmed together. This group of transactions is known as a block, and blocks are confirmed roughly every 10 minutes.

Transactions in blocks are confirmed once the block has been added to the blockchain (which is basically a recorded chain of all previously confirmed blocks). The process of adding a block to the blockchain is known as mining, and involves a miner solving a complex puzzle faster than all the other miners. When a Bitcoin miner successfully solves this puzzle, they have effectively mined the block, it's added to the blockchain, and the transactions in the block are now confirmed (some simplification here).

The miner is given Bitcoin as a reward for ‘spending’ their electrical power to solve the puzzle and for adding the new block of now confirmed transactions to the blockchain. This is how all miners are incentivised to keep mining. As mentioned above, the competition to solve this puzzle and add a new block to the blockchain happens roughly every 10 minutes.

OK, so what is this mysterious puzzle that the miners are trying to solve? You may be sorry you asked…

Specifically, the miners have to find a SHA256 hash of the current block combined with a random number they can choose. They keep hashing the block with different random numbers again and again until they find a block and random number combination that produces a hash output with an agreed amount of zeros.

Alright, too much information… simply put, it’s like they are all trying to solve a giant Sudoku puzzle against the clock, i.e. difficult to solve, but easy to verify that the Sudoku solution is correct once finished. Once everyone agrees the miner’s submitted solution is correct, the block is mined, the miner who solves the puzzle gets the reward, and the process begins again.

The halving event

The halving event is one of the things that contributes to Bitcoin’s scarcity as an asset: the reward for successfully mining a block is currently 6.25 Bitcoin, but every 4 years this reward halves. Hence, the halving event.

At some point in April this year, the block reward is going to be halved to 3.125 Bitcoin, meaning that from this point on, miners will only receive half the amount that they used to in return for mining a block. This means that the amount of new Bitcoin created per block is halved, effectively reducing the supply of new Bitcoin on the network from the halving event onwards.

The supply of new Bitcoin per block is halved roughly every 4 years. To be exact, it’s actually halved after every 210,000 blocks, and since a block is mined every 10 minutes this works out at roughly a halving every 4 years. This will continue until a point in the future (sometime around the year 2140) when no new Bitcoin can be created.

At this point, the total amount of Bitcoins in existence will be 21 million. This means over time, Bitcoin essentially becomes more scarce, its supply can never be expanded, and it is therefore resistant to inflation. This is the opposite of national currencies (and also many other cryptocurrencies) whose supply is ‌often increased and therefore reducing in relative value, i.e. inflation.

Often, inflation is caused by central bank and government money printing programmes, which have the effect of devaluing national currencies and therefore reducing the value of everyone’s savings. At a time when many nations' governments and central banks have had significant money printing programmes in place for extended periods of time (to combat the economic effects of the 2008 crash and more recently the impact of COVID-19 and associated lockdowns), Bitcoin has become increasingly interesting to investors and traders looking for alternative assets to potentially protect their cash from these inflationary effects.

What’s happened in previous halving events?

What happens when you reduce supply of an already scarce asset whilst at the same time demand is increasing? In theory, you'd expect the price of the asset to rise: Economics 101. The first halving event in 2012 was when this theory was put to the test. It turned out to be a positive moment for Bitcoin, with prices increasing significantly over the next 12–18 months.

At the next halving event in 2016, the price of Bitcoin was around $650 at the time. Post-halving, Bitcoin went on a meteoric rise to an all-time high (ATH) of around $19,500 in 2017, before declining all the way back down to around $3,000 in 2018.

At the halving event in 2020, the price of Bitcoin was around $8,500. Post-halving, Bitcoin again gradually went on another significant run, reaching a new ATH of around $69,000 in 2021, before declining all the way back down to around $16,800 in 2022.

What can we expect from this halving event?

Realistically, no one really knows, but many analysts suspect the price of Bitcoin may rise again, due to the reduced reward, reduced supply, and increasing demand on the overall economics of the ecosystem. However, this is in no way guaranteed and in reality, anything can happen.

How will it affect other cryptocurrencies?

Although the halving event in April is a Bitcoin specific event, historically the subsequent Bitcoin price has also affected the rest of the cryptocurrency market.

When public interest in Bitcoin increases (often due to increased press articles around volatility and price moves) this also often increases public interest in other cryptocurrencies, which in turn affects their prices too. This is particularly evident in Bitcoin bull markets (when the price of Bitcoin is rising over an extended period of time) and Bitcoin bear markets (when the price of Bitcoin is falling over an extended period of time), where other cryptocurrencies' rises and falls are well correlated with Bitcoin’s.

We’ll soon see what happens… note to self, stop checking prices every day like a maniac and check back in in early 2025! As always, past performance is no guarantee of future results.