Crypto hasn’t been around very long in the grand scheme of things. But it’s certainly old enough to have a rich history of astonishing innovation and technological advancement.
Satoshi Nakamoto designed the Bitcoin halving process to set up Bitcoin for its promise to decentralize traditional finance far into the future. With the next halving set to happen in 2024, it's important to understand why Bitcoin halving was worked into Bitcoin's very infrastructure, and what effect it has on everything from mining rewards to the Bitcoin landscape at large.
The Early Days of Bitcoin
Back in 2009, Satoshi Nakamoto mined the very first Bitcoin block called the "genesis block." This was the birth of a decentralized digital currency that would still be changing the financial landscape nearly 15 years later.
Just two years after launch, in 2011, the first altcoin called Namecoin appeared on the scene. This was one of the early signs that Bitcoin had successfully pioneered a new technology that would spread beyond its own existence.
By 2010, Laszlo Hanyecz made one of the first and most famous purchases with Bitcoin — two pizzas for 10,000 BTC. Back then, it all felt like fun and games. But Satoshi had been thinking well beyond buying pizzas and trading coins back and forth with friends. If he hadn’t had a much larger vision for Bitcoin’s future, he would not have written the Bitcoin halving into the protocol.
What is a Bitcoin Halving Event?
The Bitcoin halving event, also known as "The Halvening," is a pre-programmed event that takes place after every 210,000 blocks are mined — or roughly every four years. It's a crucial aspect of how Bitcoin's supply and its economic model function. During Bitcoin halvings, block rewards given to Bitcoin miners for verifying and adding new transactions to the blockchain are reduced by 50%.
Satoshi Nakamoto intentionally engineered this halving into the Bitcoin network to serve a few key purposes. First, it reduces the rate at which new bitcoins are introduced into circulation, which helps control inflation. Secondly, it adds scarcity to the Bitcoin ecosystem by limiting the supply of bitcoin, similar to precious metals like gold. As time goes on and fewer new bitcoins are created, scarcity drives up demand, potentially increasing the value of each bitcoin.
When Bitcoin was first launched, miners received a block subsidy of 50 bitcoins per block. In 2012, that dropped to 25 bitcoins, followed by 12.5 in 2016 during the second halving, and 6.25 in 2020. This process will continue until the maximum supply of 21 million bitcoins is reached, at which point miners will only receive transaction fees as a reward for verifying transactions. This will also make Bitcoin a deflationary currency.
If you need a quick refresher, Bitcoin’s public ledger holds all transactions in blocks of data. Miners, individuals or groups with specialized hardware and software, compete to solve complex mathematical puzzles and validate these transactions as part of the Proof of Work system. The first miner to solve the puzzle gets to create the next block and receives a reward in the form of new bitcoins. That is — until the number of bitcoins in circulation reaches its 21 million cap.
Bitcoin in 2012
Before the first halving event in 2012, Bitcoin was still in its infancy. The mining ecosystem was not as it is today, and anyone who wanted to gain Bitcoin rewards was buying up computer CPUs and GPUs to increase their processing power, driving up prices for computer parts.
Leading up to the halving, there was both anticipation and skepticism within the Bitcoin community. There were many debates and discussions about whether the halving would have its intended impact, or if BTC would simply go to zero.
Traders and investors speculated about how high the price might go and whether miners would continue securing the network for half the profits. There was a general belief that reducing the BTC per block reward could potentially increase demand, boosting the price. But skeptics were convinced investors and miners alike would bail and crash the price.
The First Halving
After block rewards were cut for the first time from 50 BTC to 25 BTC in 2012, there was a significant surge in Bitcoin's price. Bitcoin saw an astonishing 1,800% increase. The price skyrocketed from just $12.35 to $230 within four months.
The network hash rate experienced a slight drop immediately after the halving but quickly recovered. In time, hash rates also increased by more than 700% as miners continued to support the network.
Initially, miners faced a 50% decrease in their profitability. But instead of giving up their commitment, it forced innovations in mining hardware and energy solutions. Dedicated mining equipment called ASICs (Application-Specific Integrated Circuits) were created with much higher processing power than regular CPUs and GPUs. This, along with the soaring Bitcoin price made up for the reduced block rewards.
Around this time, the general public started taking notice of Bitcoin because of its outrageous gains. This built confidence in cryptocurrencies and more people started adopting it.
The first halving showcased Bitcoin's resilience. Despite initial concerns and doubts, the network continued to function and grow more secure. And the price was soaring, playing a pivotal role in attracting more investors and pushing Bitcoin into the mainstream.
The Next Halving in 2024
Since that first halving in 2012, there have been two more, cutting block rewards down to 6.25 BTC in 2023. The next Bitcoin halving is expected to take place in April 2024 and again, it’s a topic of supreme interest within the cryptocurrency community.
Every time a halving approaches, it raises questions about how it might impact the Bitcoin mining economy and the broader digital asset landscape.
The exact price of Bitcoin after the next halving remains uncertain and will depend on many things like market dynamics, technological advancements, and shifts in demand. But the halving in 2024 will likely follow the same pattern as previous ones. Prices and hash rates may initially dip, but network strength and long-term value will continue to grow.
Today, mining remains a power-intensive operation, with electricity costs posing a significant concern. Miners often seek locations with low-cost electricity to maintain profitability, which has led to the emergence of mining farms in regions with abundant and affordable energy.
Currently, publicly listed miners are mining Bitcoin at a cost ranging from $10,000 to $15,000 per bitcoin. After the halving, these costs are projected to double, potentially reaching $20,000 to $30,000 per Bitcoin. If Bitcoin's price remains below the breakeven point of $30,000, many miners could find themselves operating at a gross loss.
Efficiency in mining operations and the utilization of energy-efficient equipment will remain hugely important. Miners are shifting their focus from merely increasing their hashrate to ensuring the efficiency of their operations and the machines they use. This transition reflects the industry's need to continuously improve efficiency and innovation.
Looking to the Next Bitcoin Halving
As we anticipate the future end of block rewards, network activity that generates transaction fees becomes more important. When miners receive a minimal block subsidy to maintain the network, transaction fees must give them enough incentive to continue.
This is where protocol innovations in 2023 like Ordinals bring optimism. With NFTs on Bitcoin and more use cases being created each day, there are more reasons to submit transactions and generate fees for miners. This, in turn, helps to keep the network secure.
Heading into the halving of 2024, new ideas developed on a tried and true network protocol promise to keep the future of Bitcoin bright.