The Bitcoin halving is coming — what it means

A Bitcoin halving is expected to take place on 20 April, marking the fourth time it has occurred since the cryptocurrency’s first block was mined in 2009.

Each Bitcoin block contains several transactions, and “miners” are incentivised to help process transactions and secure the blockchain through block rewards.

Halvings are when these block rewards are halved. They occur every 210,000 blocks.

The block reward has been 6.25 bitcoin (BTC) since the most recent Bitcoin halving event on 11 May 2020.

The upcoming halving will reduce it to 3.125 BTC.

To fully appreciate the Bitcoin halving and its implications, knowing how Bitcoin is “mined” is necessary.

Bitcoin employs a blockchain as a ledger for all transactions. These transactions are grouped into “chained” blocks, each “linked” to the one before.

This chaining from one block to the next is part of what secures blockchains against transaction information being altered.

Miners compete to see who can solve a cryptographic hash for a block of transactions first.

Once solved, the transactions are added to the blockchain in a way that makes it computationally infeasible to alter them.

The winning miner (or mining pool) then earns the block reward.

This process is called mining because the reward they receive is new bitcoin added to the economy.

From around 03:15 on Saturday morning, miners will receive 3.125 BTC per completed block instead of 6.25 BTC.

But why halve the block reward? This seems to disincentivise miners, who would earn less for the same amount of work.

It comes down to the basic economic principles of supply and demand.

When Bitcoin’s pseudonymous creator, Satoshi Nakamoto, first launched the blockchain in 2009, its supply was capped.

Since inception, the maximum number of bitcoins that could ever be mined was 21 million.

At launch, the block reward was 50 BTC. Back then, it was worth nothing. Today, it is worth over R7 million.

The Bitcoin blockchain automatically adjusts mining difficulty, so every block takes about 10 minutes to solve. If the block reward remained constant, all bitcoins would have been mined in just under eight years.

Thus, it was calculated that if the mining reward were to halve after every 210,000 blocks, the Bitcoin supply would only be exhausted by 2140.

This aims to protect the cryptocurrency against any inflationary effects by controlling its scarcity and maintaining the longevity of block rewards.

The table below shows the effect of halving events on the block reward and price of Bitcoin.

Impact of the Halving

When the value of block rewards decreases, so does the immediate return on investment for miners.

As a result, individual miners and mining companies experience a significant decrease in revenue — unless they hold onto the cryptocurrency and sell later, when the price will hopefully be higher.

These immediate revenue losses could be around R189.5 billion per year, according to a Bloomberg report.

“With revenues across the board decreasing overnight, the strategic response of each miner, and how they adapt, could well determine who comes out ahead and who gets left behind,” said Matthew Kimmell, a digital asset analyst at CoinShares.

Bloomberg mentioned that although miners compete against one another, they also compete against artificial intelligence (AI) firms with similar technology and energy requirements.

These AI companies can also afford to pay three times as much for energy than the miners can, whose budgets depend on the price of Bitcoin.

The halving will also draw attention to the scarcity of Bitcoin at a time when it’s more accessible than ever as a result of ETF approvals in the US, says K33 CEO Torbjørn Bull Jenssen.

“It is therefore not unlikely that we can see a pre-halving pump, followed by a correction before the underlying growth trend in adoption and awareness drives Bitcoin towards new highs,” Jenssen adds.

He mentioned that Bitcoin has seen an appreciation of 14% in the month leading up to the halving so far.