The first Bitcoin ‘halving’ event in four years is expected to take place next week and will begin a new chapter for the world’s largest cryptocurrency and the scale at which it is mined.
The past few months have seen a meteoric rise in the price of bitcoin, with the launch of spot price ETFs in the US driving gains to new record highs above $70,000.
While the price of bitcoin has fallen back slightly from its peak of $73,805.27 in March, investors are bracing for the asset’s first halving event since May 2020.
This is Money looks at what bitcoin halving is, why it’s happening now and how it could affect its value.
What is bitcoin mining?
Before understanding how halving works, it is important to know how new bitcoin enters circulation.
Bitcoin mining is the process in which transactions are made as new bitcoins enter circulation in a blockchain.
The purpose of mining is to validate transactions to prevent fraud, as well as to add new blocks to the blockchain ledger.
Bitcoin mining involves using a powerful computer to solve complex hash puzzles. The first user – or miner – to solve the puzzle is rewarded with bitcoin.
What is bitcoin halving?
In an effort to control the supply of new bitcoin, halving occurs when 210,000 blocks are mined, with the reward for successful mining reduced by 50 percent.
This happens every four years or so and helps smooth out new supply of bitcoin, which is limited to 21 million coins.
The next halving is expected to happen on April 18 – but could be a few days sooner or later.
By 2140, it is expected that the overall limit on the number of coins available will be reached.
Why does this happen?
It’s hard to know for sure why bitcoin is set up this way.
As eToro market analyst Simon Peters points out, bitcoin creator Satoshi Nakamoto keeps a very low profile with his last public statements coming in 2010.
Many believe Nakamoto may not even exist and the name is a pseudonym used by the original creator – or creators – of bitcoin.
Peters says ‘the most logical theory’ is that by gradually reducing the amount of new coins entering circulation, ‘halving helps increase the value of the network over time’.
He adds: ‘This month’s halving will see the reward drop from 6.25 to 3.125 bitcoin per block, meaning the annual supply inflation rate will effectively drop from 1.7 percent to 0.84 percent.’
How could halving affect the price of bitcoin?
Fineqia International CEO Bundeep Rangar told This Is Money that bitcoin halving events have “historically been associated with significant price increases.”
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He explained that the reduction in the rate of new coin creation leads to a decrease in selling pressure on miners.
This can therefore contribute to a supply shortage and drive up prices if demand remains constant or increases.
eToro’s Peters adds that many in the crypto community believe this month’s halving could push the price of bitcoin into the six-figure mark.
He says: ‘The last bitcoin halving happened in May 2020, when the price was around the £7,000 mark, a tiny fraction of what it is today.
With investor interest in bitcoin already rekindled earlier in the year by the approval of spot ETFs, many in the crypto community believe that this month’s halving could fuel even more positive sentiment around bitcoin and push the price towards the $100,000 mark can push.’
After this event, when is the next halving likely?
While it is difficult to say when exactly this date will occur, Peters estimates that it will likely occur by the end of the first quarter of 2028.
Fineqia’s Rangar added: ‘Given that each block is mined approximately every 10 minutes, and with an average of 144 blocks per day, the next halving should occur approximately four years from the date of the current halving event.’
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