Bitcoin Halving is less than a year away, but what does it mean for Bitcoin?
What is Bitcoin Halving, and why is everyone anticipating it?
Since 2009, Bitcoin has had three “halving events”, and they all positively impacted the price of Bitcoin. This meant earlier Bitcoin investors, Bitcoin miners included, benefitted from this. But will the next Bitcoin Halving drive the same result?
Stick around in this deep dive into Bitcoin Halving.
What is Bitcoin Halving?
In short, Bitcoin Halving is an event where Bitcoin miners will earn only half of new Bitcoins from mining when compared against the rate before the event.
When Bitcoin was first introduced to the world, Bitcoin miners could earn around 7200 new Bitcoins every single day. In November 2012, that number dropped to 3600, and in July 2016, only 1800 could be earned daily. Fast forward to 2023, miners on average earn 900 BTC per day, and in the next and fourth Bitcoin Halving, only 450 new Bitcoins will be issued per day.
We often talk about the Bitcoin mining rewards in terms of rewards per block, which at the current rate is 6.25 BTC per block, which happens roughly 10 minutes.
Why is everyone so excited about Bitcoin Halving?
At first glance, Bitcoin Halving may sound like a bad thing, especially to miners, but many sophisticated Bitcoin investors believe that this core feature is what makes Bitcoin valuable in the long term.
It’s actually a very good thing — and this statement is backed by basic economics and the historical returns of Bitcoin. While governments around the world will always issue new money and expect some level of inflation, Bitcoiners expect the opposite for Bitcoin.
When Bitcoin’s mining reward gets cut in half roughly every four years, it effectively cuts its own inflation rate in half. So, now we have a deflationary asset that will become increasingly scarce, kind of like gold.
In fact, that’s how Bitcoin got the nickname of “digital gold”.
How Bitcoin Halving impacts Bitcoin’s price
A product increases in value when there are fewer of it left in the market, and if not enough of it would fulfill buyers’ demand.
This is exactly what’s been happening to Bitcoin since 2009. Have a look at the chart below. The three charts represent the price changes of Bitcoin after each halving event. The chart estimates that within a year after a halving event, Bitcoin’s price increased dramatically to a point of reaching its new all-time highs.
The last halving was set in 2020, and if you look at the green chart representing that period of time, you’ll see how the same pattern emerged.
How Bitcoin Halving impacts the overall crypto market
When the “total crypto market capitalisation” increases, it implies that a lot of monetary value has been transferred into the market, leading to an average increase in price of crypto coins and tokens apart from Bitcoin.
If you ask any crypto trader, you’ll find that they will prefer to trade altcoins with higher earning potential, once they’ve seen an increase in Bitcoin’s price. Indeed, Bitcoin price has traditionally been used to gauge the overall crypto market sentiment.
In short, a higher Bitcoin price will likely cause money being transferred elsewhere in the crypto market, whether it’s a high-value utility token or a memecoin.
Bitcoin Halving is overall a good thing for the crypto economy
If you look at the chart below from Glassnode, you can see how despite Bitcoin’s issuance rate decreasing continuously , its price actually increases over time, which can also imply that Bitcoin miners are increasingly profitable if they sell “older” Bitcoins in their stock.
What happens when all Bitcoins have been mined?
The Bitcoin protocol, the programme responsible for governing how Bitcoin transactions work, and issuing new Bitcoins, also puts a limit on the total number of possible Bitcoins to be mined by miners — which is 21,000,000 Bitcoins.
At the programmed rate, all 21 million Bitcoins will have been mined in the year 2140. Meanwhile, Bitcoin miners will experience a total of 32 halving events throughout the span of a century before this happens.
Mining revenue will continue to halve until no more Bitcoins can be mined. Having no more revenue from new Bitcoins, miners will eventually earn revenue purely from transaction fees. At the moment, transaction fees make up 6.5% of the total revenue, with the rest being earned from block rewards. This number will shoot up to 100% when no more Bitcoin can be mined.
But what will happen to the Bitcoin network when that happens? We’re now going to tread carefully into a speculation zone, where nothing that is said here is 100% guaranteed to be true and therefore you should do your own independent research.
If Bitcoin is still around by then, there’s a good chance that a lot of things would have changed by then. The generation of people that will maintain the Bitcoin protocol tomorrow may or may not value some of Bitcoin’s main philosophy that core maintainers believe in today.
However if Bitcoin were to remain identical in the year 2140 to its current version 2023, here’s what may happen:
Possibility #1: Bitcoin’s transaction fee may increase to compensate for network security.
Bitcoin’s transaction fees are optional and not enforced by the protocol. However, miners often prioritise transactions that pay higher-than-average fees, and some may not even pick up zero-fee transactions. Without block rewards, miners may pick up only high-fee transactions. In this scenario, transactions will be reserved for transfers of very significant amounts of Bitcoins.
Possibility #2: New Bitcoin Layer 2 networks will enter the market.
As of today, Bitcoin’s first Layer 2 network is already operational, namely the Lightning Network. This network helps Bitcoin users to transact faster and at a cheaper cost compared to if they’d used the Bitcoin network as it is. Of course, the Lightning Network must then store its latest ledger state onto the actual Bitcoin network in order to safely settle all of its transactions.
We’re also seeing the emergence of Layer 2 networks with programmable contracts that use Bitcoin as a primary asset — something that wasn’t inherently programmed into Bitcoin. An optimistic view of the future of Bitcoin is that the network will become even more innovative as miners are forced to earn revenue by other means.
Bitcoin will likely upgrade within the next 100 years
It’s much more interesting to think about a possible future update for Bitcoin to improve security while remaining profitable to Bitcoin miners and those who are responsible for processing transactions.
Bitcoin may one day have the ability to maintain the integrity of its ledger by programmatically encouraging decentralisation of mining or processing power. This could prevent mining pools from colluding and overtaking the majority of the network and attacking the ledger, even with a lower Proof of Work difficulty.
A more extreme upgrade may see Bitcoin’s consensus protocol moving to Proof of Stake, just like what Ethereum did in 2021. This could eliminate the threat of a majority network attack, and could make the network way more energy efficient.
Bitcoin Halving is an event where the Bitcoin protocol cuts the block reward by half, and where Bitcoin miners will receive only half of the revenue compared to previously. In the short term, a cut in the miners’ profit may hurt miners, but not to a point where it becomes harmful to the entire network.
Miners that could survive the halving event may delay selling their mined Bitcoins, and instead set a much higher price before the cryptocurrency reaches public hands. Some miners may need to innovate in order to stay in business, such as upgrading their machines or finding cheaper and more sustainable energy sources.
Bitcoins are mineable until 21 million of them are in circulation, approximately by the year 2140. Meanwhile, miners will have experienced a total of 32 Halvings, and will continue to innovate to stay in business.
Bitcoin in the future may change due to an ever-changing economic model. As transaction fees become a more dominant source of revenue for miners, it may get even more expensive to send Bitcoins. Thus, Layer 2 networks like the Lightning Network may become the primary ways people send Bitcoins.
It’s also possible to see Bitcoin’s consensus protocol make a switch to Proof of Stake, although it seems far-fetched today.
Stay curious and informed
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated September 5, 2023