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Posted on Mar 31st, 2021

Bitcoin Halving: What It Is and What You Need to Know

CONTRIBUTING AUTHORS

Jeremy Lin, CFA

Portfolio Manager

Bitcoin halving, an event sometimes known more ominously as "the Halvening," is when block rewards from Bitcoin mining get cut in half. This means that the issuance of new Bitcoin is also cut in half.

Although the name sounds like something from a horror movie, the event is intentional. It is a feature specifically built into Bitcoin’s software as a means of ensuring monetary soundness over time by periodically reducing the rate of inflation.

There are two important concepts to be aware of: (1) every ten minutes or so, the Bitcoin miner who finds a new block is paid a block reward equal to 6.25 Bitcoin, and (2) miners are compensated not only by the receipt of new Bitcoin in the form of the block rewards, but also in the form of transaction fees paid by users submitting transactions into new Bitcoin blocks.

When does Bitcoin halving occur?

The halving occurs whenever 210,000 Bitcoin blocks are mined, which is programmed in Bitcoin’s software code to happen roughly every four years, assuming a time per block of ten minutes. Because of the rapid growth of Bitcoin’s network, recent halvings have occurred slightly less than four years each time, with the most recent occurring on May 11, 2020.

On average, the time to find a new block historically has been around 9 minutes and 30 seconds. The Bitcoin roadmap indicates that this structure will apply until the year 2140, after which miners will get compensated through transaction fees only. After the year 2140, no additional or “new” Bitcoin will be issued. In other words, Bitcoin has a fixed supply of 21 million that will never be exceeded, based on the rules of the Bitcoin software.

Why does Bitcoin halving occur?

Bitcoin halving can be looked at as a mechanism to cap the Bitcoin supply and make Bitcoin issuance similar to a precious metal like gold, where supply issuance decreases as more is discovered. Bitcoin’s supply is set at a maximum of 21 million, which is expected to be reached some time around the year 2140.

There are currently about 18.6 million Bitcoin outstanding, which only leaves about 2.4 million Bitcoin left to be mined. Back in 2009, when the first Bitcoin was mined, you could get 50 Bitcoin as the block reward if you were a Bitcoin miner. As of May 2020, you can only get 6.25 Bitcoin as a reward for mining a block. We’ve gone through a three halvings since the launch of the Bitcoin blockchain(from 50 Bitcoin to 25, then from 25 to 12.5, and most recently from 12.5 to 6.25). The next halving is expected to occur around spring of 2024.

How does the halving affect the price of Bitcoin?

Although there have only been a handful of Bitcoin halvings, when they have occurred, they were accompanied by a dramatic increase in Bitcoin prices. In November 2012, when the first-ever Bitcoin halving happened, Bitcoin ran up from US$12 up to a whopping US$1,150 in only a year.

After the second bitcoin halving in 2016, the price shot up from US$650 to top the US$20,000 mark, before suffering a large drawdown to the US$3,200 level. Following the most recent halving in May 2020, we've seen a similar event play out again with Bitcoin price getting to new highs of well over US$50,000.

Given the limited sample size, it’s hard to determine whether the increase in price is predominantly due to the halving, or simply because of the increased adoption of Bitcoin and other cryptocurrencies.

The reason why a potential increase in price may be attributed to the Bitcoin halving is simply supply and demand. Whenever there is a decreased supply, the price required to clear an unchanged level of demand needs to be higher. Bitcoin is often considered an alternative to gold and an inflation hedge for this precise reason. As more gold in the world is mined, the economically extractable amounts of in-situ gold decline as well and set the stage for higher prices under constant demand conditions. Without higher prices, greenfield gold mining projects become more rare and less economic.

Bitcoin halving chart from 2010 price USD

Why do miners keep mining whenever Bitcoin is halved?

Well, some of them don’t. Whenever the Bitcoin halving occurs, mining for the same number of Bitcoin as before the halving becomes twice as difficult. This has the implication of pushing out the highest cost miners, leading to a reduction of mining power (often referred to as “hash power”). Bitcoin’s software automatically adjusts to this new reality by adjusting the difficulty of finding new blocks so that each block is mined every ten minutes or so. As a result, miners with the lowest capital costs and electricity costs are best positioned to most profitably mine Bitcoin and survive the supply shocks caused by the halvings every four years.

Although it seems ominous, at Purpose, we see Bitcoin’s halving as a crucial means of ensuring a sound monetary policy for Bitcoin. The halving of Bitcoin’s supply approximates the issuance cadence of a precious metal like gold that has been a store of value for hundreds of years. In this context, many refer to Bitcoin as digital gold because it carries the same scarcity properties as the yellow metal.

— Jeremy Lin, CFA is an Associate Portfolio Manager


All data sourced to Bloomberg unless otherwise noted.

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