Understanding The Bitcoin Halving: Impact on Supply, Miners, and Market Dynamics

In this installment of my explanatory series Understanding Crypto, I will cover the Bitcoin (BTC) halving event. You’ve likely come across the term “Bitcoin halving” before, but maybe you’ve wondered what it means. After reading this article, you’ll be wowing the crowd whenever the topic arises!

Introduction to The Bitcoin Halving

The Bitcoin halving is a critical component of the monetary policy that guides the asset. It was encoded into the core protocol by Bitcoin’s presumed creator, who goes by the pseudonym Satoshi Nakamoto.

Embedded within the very fabric of Bitcoin’s blockchain, the halving event is a predetermined and immutable feature that occurs approximately every four years, or more precisely, after every 210,000 blocks mined. This mechanism plays a critical role in regulating new Bitcoin issuance, maintaining its scarcity and value proposition. It is one of the biggest components of Bitcoin’s supply schedule that contributes to its ingenious scarcity.

Simply put, the Bitcoin halving is a key piece of what makes Bitcoin so special and scarce compared to other stores of value.

The immutability and hard-coded nature of Bitcoin’s issuance and supply schedule is what makes it different from other currencies and stores of value. No matter what you or I do, we could never change the fact that there will only ever be 21 million Bitcoin. That also goes for governments or central banks, as they hold no power over Bitcoin’s issuance. That means they can’t tamper with Bitcoin the way they have diminished the value of the dollar or other foreign currencies.

Gold is considered one of, if not the, best stores of value of all time. However, if a gold miner wanted to increase quarterly revenue they could hire more people and mine more gold at any point in time. That would obviously change the rate at which gold is supplied to the market, causing a cascade of downhill effects. That could never happen with Bitcoin; the issuance rate only changes once every four years… when it is cut in half at the Bitcoin halving.

The block reward is the incentive provided to miners for validating transactions and adding them to the blockchain. In the beginning, Bitcoin’s block reward stood at a generous 50 Bitcoins per block mined. This initial block reward was intended to bootstrap the network and incentivize early adopters. The big reward was instrumental in kick starting the Bitcoin ecosystem.

However, as outlined in Bitcoin’s protocol, this block reward undergoes a halving event approximately every four years, resulting in a 50% reduction in the reward.

Over the years, these halving events have had a profound impact on the issuance rate of new Bitcoins. Following the first halving in 2012, the block reward decreased from 50 Bitcoins to 25 Bitcoins per block. Subsequent halvings in 2016 and 2020 slashed the block reward to 12.5 Bitcoins and 6.25 Bitcoins, respectively.

This reduction in the block reward has led to a gradual decrease in the rate at which new Bitcoins are introduced into circulation. This process ultimately culminates in the issuance of the final Bitcoin around the year 2140.

Impact of Bitcoin Halving on The Crypto Market

You might be wondering why the Bitcoin halving matters to you or the casual investor. Well, the truth is the halving has a direct and profound effect on the crypto market.

The Bitcoin halving’s impact on the market is easily understood by simple supply and demand economics. It affects supply and scarcity in the crypto market, reducing the issuance rate of new Bitcoins. This leads to a decrease in the available supply of new coins.

You’ve got to keep in mind that since the halving cuts the rate of Bitcoins earned by miners, that also reduces the rate at which miners can supply Bitcoins to exchanges. That translates to less Bitcoin available to buy on exchanges over time.

Meanwhile, demand for Bitcoin continues to rise due to factors such as adoption and institutional interest. The halving contrasts the reduction in supply with the increase in demand, shaping the market dynamics significantly.

Additionally, we are currently experiencing increased demand from institutional buyers through the new Bitcoin exchange-traded funds (ETFs). This steady demand for new Bitcoin paired with the upcoming Bitcoin halving in April 2024 should lead to increased prices.

The scarcity created by the Bitcoin halving serves to heighten the asset’s perceived value, as investors anticipate a future environment of constrained supply against rising demand. This anticipation often manifests in bullish price action leading up to and following halving events, as market participants adjust their expectations in response to the diminishing supply of new coins.

The Bitcoin halving acts as a crucial market catalyst. It often ignites interest and optimism among investors, as they anticipate the potential for future price appreciation fueled by supply-side constraints.

The Bitcoin halving has historically been succeeded by a bull market. The bull market may not be a direct effect of the halving, but as I said earlier, supply and demand plays a key role in crypto, as with any investment or commodity.

Decrease in supply + steady (or increase in) demand = increase in price. The following chart depicts Bitcoin’s historical price performance after halving. The gains are impressive:

Price Corrections Surrounding Bitcoin Halvings

It should be noted that price corrections tend to occur around each Bitcoin halving. These dips often happen in the months leading up to the halving, as traders anticipate the event and adjust their positions accordingly. They’ve been treated in the past as a “buy the rumor, sell the news” type of event.

The rationale behind these price dips is typically related to profit-taking by traders who have accumulated Bitcoin during the preceding bull market cycle. Additionally, uncertainty surrounding the impact of the halving on miner profitability and network security may contribute to increased selling pressure.

However, it’s important to keep in mind that the additional demand coming from institutions via the new Bitcoin ETFs could alter the dynamic this time around.

Read This Story: Is This Crypto Bull Market Different?

The Bitcoin halving is a vital component of Bitcoin’s code that contributes to its scarcity and limited supply. It is also a topic that comes up routinely every four years, because it is one of Bitcoin’s biggest market drivers.

With just a basic understanding of the laws of supply and demand, it’s easy to see why the halving is such a big price driver. Now that you understand what the halving is and how it impacts the market, you can prepare accordingly as we head into the next critical Bitcoin halving.