The fourth so-called Bitcoin halving will take place next week. Why is this happening and how does it affect the price? The most important questions and answers.
The Bitcoin price has been unstoppable since the beginning of this year. After the last all-time high was reached in November 2021, several new highs followed in 2024.
The scandals surrounding the crypto exchanges FTX and Binance seem to have been forgotten; investors have regained confidence in the cryptocurrency. And demand is likely to continue to rise. Because soon the amount of Bitcoins in circulation will be halved again. Why is this the case and why is it so difficult to determine the exact time of the so-called halving? The most important answers.
What is a Bitcoin Halving?
Bitcoins are “mined” through a process called mining. Miners use special computers to solve mathematical problems to create new blocks that are inserted into the Bitcoin blockchain. In return for providing the required computing capacity, miners receive Bitcoins. In technical jargon, this process is called proof-of-work consensus process.
Around every four years, the amount of reward that miners receive is halved – every time 210,000 new blocks are created. Originally, miners received 50 Bitcoins for each block added. The fourth halving is taking place this month. After that, miners only receive 3.125 instead of 6.25 Bitcoins per added block.
Why is the halving taking place?
Reward halving is hardwired into the cryptocurrency’s code and is intended to regulate the total amount of Bitcoins. The concept stipulates that only a limited number of coins can be created, a total of almost 21 million. To be more precise: a maximum of 20,999,999.9769 Bitcoins.
“In order for the amount of Bitcoins to converge towards this limit, the amount of the reward distributed must become smaller and smaller,” explains Fabian Schär, blockchain professor at the University of Basel. The next halving will take place at a block height of 840,000. When this will be achieved can only be estimated: Since the Proof-of-Work consensus process is based on a decentralized network and the mining slots are assigned randomly, it cannot be determined exactly when the 840,000th block will be added.
Bitcoin was designed so that a new block is added to the blockchain approximately every ten minutes. The system parameters are automatically adjusted again and again so that this cut can be roughly maintained. “But if more computing power flows into the system between these adjustments, the value can temporarily fall below ten minutes. Over the course of four years, the sum of these small deviations can lead to a significant shift,” explains Fabian Schär. That’s why it’s impossible to set an exact date for the halving in advance. However, current estimates are from April 20th.
How does the halving affect the Bitcoin price?
“From an economic point of view, the price shouldn’t react at all,” says Schär. Ultimately, the halving does not come as a surprise, but was planned from the start. The information would therefore have to be priced into the Bitcoin price.
In his opinion, the fact that previous observations contradict this economic theory can be explained by the increased attention on the topic, which could lead to a self-fulfilling prophecy. However, Schär advises caution and generally warns against price forecasts. “Ultimately, nobody knows where it will go. The best forecast for the future price is today’s price.”
How has the course developed recently?
In the past few months, the Bitcoin price has reached new heights again after a long, difficult phase. At the beginning of March it reached a new all-time high of just over $69,200, which was exceeded again just a few days later. In mid-March, Bitcoin was temporarily trading at $73,750, and since then it has increasingly exceeded the 70,000 mark.
This price increase is primarily due to the approval of so-called Bitcoin ETFs by the American Securities and Exchange Commission (SEC) in January. These investment vehicles allow individuals and professional investors to purchase Bitcoin through traditional funds. But market observers also cite the expectation of the upcoming halving as a reason for the price increase.
How has the market reacted to past halvings?
Bitcoin has always responded to previous halvings with a significant price increase. In November 2021, the number of Bitcoins paid out was halved for the first time, from 50 to 25. At that time, the Bitcoin price was $12.35. After 150 days it rose to $127 and peaked at around $1038 between the first and second halvings in December 2013.
The second halving took place in July 2016, with a halving to 12.5 Bitcoin. At the time of the halving, the price was $650.63; the high was reached in December 2016 at $20,000. The third and so far last Bitcoin halving took place on May 11, 2020. After this halving, the increase was most extreme: within a very short time, the Bitcoin price exceeded the $60,000 mark.
What are the implications for miners?
“The miners are willing to use computing power as long as it is worthwhile for them,” says Fabian Schär. By halving the number of Bitcoins paid out, mining becomes less attractive, which threatens to reduce the computing power in the system – but only if all other factors remain the same. “If, for example, the Bitcoin price or transaction fees were to rise, losses could be offset,” says Schär.
If this is not the case, in order to remain competitive, miners would have to become more efficient over time. Miners who are not profitable exit the market because they cannot make profits. “This can potentially lead to greater centralization in the market, as fewer miners process the transactions,” says Schär.
What happens when the last Bitcoin is “mined”?
By reducing rewards for miners, the last Bitcoin is expected to be mined in 2140. From this point on, the Bitcoin miners’ job is only to validate and confirm transactions.
“The exciting question will be whether these transaction fees will be high enough to guarantee sufficient security for the system,” says Schär. Because when miners leave, computing power also drops and Bitcoin becomes more vulnerable. «Imagine if I were the only one who used my computer to mine Bitcoins. Then you could attack the entire blockchain with just two equivalent computers and roll back transactions.”
And with every halving, says Schär, this question becomes more pressing. “The importance of transaction fees increases every four years.”