that Bitcoin halving is an event that is of great importance not only for miners, but also for investors, analysts and the entire Bitcoin community. With the next halving, expected around April 20, 2024, a decisive moment is approaching that drastically reduces the supply of new Bitcoin and has potentially long-term effects on the market.
Halving is a mechanism built into the Bitcoin protocol to control the issuance of new coins and make the currency disinflationary or deflationary in the long term. Every 210,000 blocks, roughly every four years, the reward that miners receive (in addition to transaction fees) for adding a new block to the blockchain is halved. This process will continue until the maximum number of 21 million Bitcoin is reached, which is expected to be in 2140. Initially, miners received 50 BTC per block. After the first halving, this reward dropped to 25 BTC, then to 12.5 BTC and finally to 6.25 BTC in 2020. The next halving will reduce the reward to 3.125 BTC, which, according to current calculations, is likely to happen on 20 April 2024, as already mentioned.
The concept of halving was introduced by Satoshi Nakamoto, the mysterious creator of Bitcoin, to create a digital scarcity, similar to natural resources such as gold or land. Since the initialisation of Bitcoin, there have already been several halvings, each of which has led to a reduction in the block subsidy - from the original 50 BTC in 2009 to the current 6.25 BTC.
The reduction in the number of new Bitcoin brought into circulation after each halving creates a shortage effect. Theoretically, if demand for Bitcoin remains the same or increases, a reduction in supply could drive the price up further. This assumption is based on the fundamental economic principles of supply and demand and has been confirmed in the past by price increases following previous halvings. However, the information about the realisation of this effect is generally known, which repeatedly leads to heated discussions about whether the impending shortage is already priced in or not. In view of the extreme increase in demand in recent weeks due to the emergence of US Bitcoin ETFs and the resulting price increases, further all-time highs are certainly possible following the additional shortage. On many days, more than 10,000 Bitcoin per day were accumulated by the ETFs, while currently only around 900 BTC per day (6.25 BTC every approx. 10 minutes) are added through mining. After the halving, there are only 450 BTC in new daily inflows.
For miners, halving means a direct reduction in their income (denominated in Bitcoin), as they receive less Bitcoin on average for their work. This could be particularly challenging for miners with higher operating costs and could lead some to reduce or stop their mining activities. In the long term, however, this could promote the decentralisation of the network, as mining activities could diversify geographically. Of course, this could also be offset by a corresponding price increase.
Block premium = block subsidy + transaction fees
In the long term, the block subsidy will play an increasingly smaller role in the remuneration of miners, which is why it is widely anticipated that transaction fees will rise to compensate for this.
Each previous halving led to speculative price rises in the run-up to the event, followed by real price increases. Investors are closely monitoring these patterns to identify potential market opportunities. However, it is important to emphasize that the crypto market is volatile and affected by numerous external factors, meaning that price increases are not guaranteed. In addition, they are currently in uncharted territory, as Bitcoin had set a new all-time high for the first time even before halving at the beginning of 2024.
The imminent halving also marks a historic turning point at which Bitcoin is actually becoming scarcer than gold. By reducing block subsidies and the resulting slowdown in new production of Bitcoin, the ratio between existing supply and new production, known as the stock-to-flow ratio, that of gold by about double. This scarcity measure shows that Bitcoin, with its fixed maximum quantity and predictable spending plan, will become an even scarcer “resource” after halving. With an approximate annual inflation rate of then only approx. 0.85% The superiority over gold in terms of scarcity could further strengthen Bitcoin's position as “digital gold” and shed a new light on its potential as a store of value for many.
Once all Bitcoin have been mined, as already mentioned, miners' income will consist exclusively of transaction fees. This change could alter the dynamics of mining and may even require adjustments to miners' business models. However, due to the wide range of opportunities to use surplus energy or subsidize renewable energy through mining, the market will also find solutions here.
Halving 2024 symbolizes the basic principles of Bitcoin: scarcity, decentralization, and immutability. It reminds us that Bitcoin is not just one cryptocurrency among many, but also a social and technological experiment that challenges the way we think about money and how we store value. It is more than just a short-term event with potential effects on prices. It is an integral part of Bitcoin's long-term value proposition, which aims to inflation to prevent and maintain the value of Bitcoin over time.
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Investing involves risks. Any financial investment can result in the loss of invested capital. This article is neither investment advice nor a recommendation to buy Bitcoin. Your own research should always be carried out before completing a purchase. Past performance is not indicative of future performance.
