Apr 5, 2024 - Economy

The fourth bitcoin halving is coming: What it means

Illustration of the Bitcoin logo with a dotted line and scissor icon across it

Illustration: Natalie Peeples/Axios

Bitcoin's fourth halving will take place later in April, dramatically slowing its inflation rate from 1.8% to 0.9%.

Why it matters: The halving always makes a major impact in the supply-demand relationship that determines the top cryptocurrency's value in the market.

Between the lines: The event refers to the "halving" of block rewards earned by miners on the network.

  • These Bitcoin entrepreneurs earn money by serving as the network's globally distributed accountants. Users send them transactions, miners check their validity and then stamp those transactions onto the permanent ledger in "blocks."

How it works: It's not enough to just log the transactions. Miners first have to encrypt the block using open-source software, then bust the lock on that encryption (the purpose of this exercise is to make malicious participation too expensive to bother with).

  • The first miner to succeed in doing this for each block of bitcoin gets to add the block, and they are rewarded with fresh bitcoin.
  • The miner that wins the block gets the whole subsidy for that block, plus whatever transaction fees users offered the network to get it processed in a timely fashion.

By the numbers: The block subsidy represents the lion's share of miners' revenue (usually more than 90%, but it varies).

  • Right now, winning a block earns a miner 6.25 BTC (roughly $442,000 at today's prices).

Every four years (more precisely, every 210,000 blocks), Bitcoin, by design, cuts the block reward in half.

  • So after this next halving, the miner that wins a bitcoin block will earn 3.125 BTC.

The big picture: This is crucial to the design of Bitcoin. When the pseudonymous Satoshi Nakamoto created the network, he wanted its coin to have a transparent, fixed supply with a predictable rate of inflation.

  • So far, 19.7 million BTC have been mined, with 1.3 million to go, but it will take many decades for those last ones to be released.

Bitcoin was made as a critique of nation-state money, whose supply is subject to the whims of politicians and their appointees.

  • Bitcoin's supply, on the other hand, is hard-coded into software that's run concurrently on hundreds of thousands computers all over the world, operated by thousands of disparate people and companies.
  • Changing it would be close enough to impossible.

Fun fact: When the last halving flipped, F2Pool, a consortium of miners that mined the last block, put a note in the block that echoed the Genesis Block of Bitcoin, mined by Satoshi himself.

  • Both blocks commemorate a headline about the profligate ways of politicians.

Mining impact

For miners, revenue is going to drop — a lot. This will likely drive a lot of smaller operations out of the market and send a lot of the oldest machines to get recycled.

  • That means the total computing power on the network (the hash rate) is likely to drop, though it's been rising fast since December 2022.
  • "The energy consumption will decrease at a faster rate than bitcoin's hashrate," The Miner Mag's Wolfie Zhao tells Axios, because miners will be retiring machines that use as much as three times more power per bitcoin mined than the current generation.

Zoom out: The miners who've been loading up on new machines should gain market share. "The halving is probably the only time a bitcoin miner can increase market share organically," Taylor Monnig, from CleanSpark's mining team, tells Axios, via a spokesperson.

On bitcoin price

When people ask about a halving, what they really want to know is what's going to happen with bitcoin price.

  • "It's a random walk," Santiago Roel, an investor with Ro Capital tells Axios. Bitcoin tends to hit a fresh all-time a while following a halving, but it's also true that there have only been three so far.

💭 Our thought bubble: Attempting to peer into the next few months is just another form of attempting to time the market, and that is how people get themselves into trouble in the crypto market. The following two facts should guide people not to play it for quick gains:

  • More people lose money entering this market than make it, because they enter in the greed phase when it's value is based on irrational exuberance.
  • The longer people have held bitcoins, the less likely they are to have lost money. Hardly anyone who has held three years or longer has sold at a loss.

This time really is different. It's the first time an all-time high price has been set before a halving.

  • That doesn't mean even higher highs can't be hit, but it does mean the market seems to have changed.
  • "The significance of the Bitcoin halving in April is being exaggerated," Stronghold Digital Mining CEO Greg Beard told Axios, via a spokesperson. "However, the latest Bitcoin rallies are much more than a fad. Bitcoin is maturing with institutional adoption."
  • To Beard, the fact that companies like BlackRock and Fidelity are buying lots of BTC for their ETF clients is a much stronger driver of the present momentum.

What we're watching: The number of bitcoins that aren't trading has been generally trending up since the last halving (which should boost price), but Coinbase has listed reasons why traders shouldn't necessarily bank on a supply crunch.

  • Many long term holders in profit now may cash out around the big event. "Unrealized profit among bitcoin holders is nearing two standard deviations from the mean, signaling signs of euphoria," Pranav Kanade, a manager at the investment managemen firm, VanEck, wrote in a recent note, shared with Axios.

Estimates for when the halving should hit range from April 16 to April 20.

  • Don't discount the memetic gravity pushing it to happen on 4/20 — which has a certain elegance for an asset whose first major use case was purchasing illicit drugs on the dark web.

The bottom line: The halving is a big moment, but it's always a recipe for disaster to play near-term guessing games around cryptocurrency prices.

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