What is Bitcoin halving and why it matters to crypto investors

What is Bitcoin Halving?

The Bitcoin Halving occurs approximately every four years and reduces the block reward by 50%. This lowers the supply of bitcoins entering the market, which increases scarcity and can act to increase its price if market conditions remain the same.

Block rewards are part of the blockchain’s automated process of validating transactions and opening new blocks (called mining). Miners, participants who compete in a race to solve a cryptographic puzzle, get new bitcoins if they are the first to solve it.

Their block is added to the blockchain, they receive a reward, and the network starts another race. All miners confirm the data in the newly added block while trying to solve the puzzle for their own new blocks, hoping for an ever-decreasing reward.

Is Bitcoin Halving a Good Thing?

There are several reasons why Bitcoin halvings are considered by many to be good for bitcoin’s ecosystem and market value. For others, this may not be such a good thing.

Inflation

One of the key concepts behind halving the reward is to address inflation issues. Inflation is a decrease in the amount of goods that a certain amount of currency can buy at any given moment. In the US, inflation is measured by how much it costs to buy a basket of goods. There is an acceptable rate of inflation that is considered good for an economy—usually 2%—but this number is generally a target set by central banks as a goal rather than an achievable figure.

The Bitcoin Halving is intended to counter any inflationary effects on Bitcoin by lowering the reward amount and maintaining scarcity. However, this inflation “protection” mechanism does not protect Bitcoin users from the inflationary effects of the fiat currency it must be converted to in order to be used in an economy.

Profits made relative to market value may provide inflation protection for investors, but this is not for the cryptocurrency’s intended use as a payment method.

Question

Because a halving reduces the number of new Bitcoins introduced, the demand for new Bitcoins generally increases. This can be noticed by looking at Bitcoin’s price after each previous halving event – it has typically gone up. The historic increase in demand has driven price increases, which is a good thing for investors and speculators.

Investment

Bitcoin was not meant to be an investment. It was introduced as a payment method that sought to remove the need to have regulatory agencies or third parties involved in transactions.

It became popular among investors once it was noticed that there was the potential for profits. Investors poured into the new asset space, creating a demand that the cryptocurrency’s designers may not have anticipated. For investors, a halving represents a reduction in the new coin supply, but it also offers the promise of an increase in investment value if the event’s effects remain the same. But this puts Bitcoin investing in the realm of speculation because those invested in the cryptocurrency are hoping for profits.

Mining

Miners are the people, groups or businesses that focus on mining for its profitability. Even though Bitcoin’s price has fluctuated over the years, it has remained a profitable endeavor—if it hadn’t, the big mining companies wouldn’t have continued to operate.

However, a halving reduces mining rewards, so the effort becomes less profitable with each halving if prices stay the same or fall. The large-scale mining facilities required to remain competitive require enormous amounts of money and energy. The equipment and facilities require maintenance and people to carry them out. They also need to upgrade their mining capacity to maintain their position in the industry.

For example, Marathon Digital Holdings, one of the world’s largest mining companies, increased its Bitcoin holdings to 16,930 and its fleet of Bitcoin miners to 231,000 in February 2024. This has the firm’s hash rate at 28.7 trillion hashes per second (about 5% of the network’s total hash rate as of May 2024).

The increase in production capacity and holdings was likely due to expectations of the April 2024 halving and the amount of hashing power needed to remain competitive while having the necessary liquidity to fund its operations.

For smaller miners, a decrease in the reward means lower chances. Miners who are part of a mining pool are likely to experience smaller rewards even if prices rise – the reward is cut in half, but Bitcoin’s price is unlikely to double unless there is a drastic market event.

Consumers

Consumers and retail Bitcoin users could be affected by a halving in the value of the Bitcoin they own. Those who buy Bitcoin to make purchases will generally only be affected by price fluctuations, which may or may not be similar to those before the halving.

For those using Bitcoin for remittances, a halving means the same thing as it does for buyers. The value of their remittances will depend on Bitcoin’s market price after the halving event.

When is the next Bitcoin halving?

The next halving is expected to occur in 2028 when the block reward will drop to 1,625 BTC. The first Bitcoin block reward was 50 bitcoin. There have been four halvings since 2009. These halving dates were:

November 28, 2012, up to 25 bitcoins July 9, 2016, up to 12.5 bitcoins May 11, 2020, up to 6.25 bitcoins April 19, 2024, up to 3,125 bitcoins

By May 2024, approximately 19.7 million bitcoins were in circulation, leaving only about 1.3 million to be released through mining rewards.

Should You Invest in Bitcoin During a Halving?

Many investors have high expectations for halvings because historically prices have generally trended upwards after the event. However, the trends have historically moved slowly, over months and years until the next halving, and there is no guarantee that Bitcoin will follow the same trajectory. So whether you invest in Bitcoin before, at or after a halving depends on market conditions at the time, your outlook and your risk tolerance level.

For example, the latest halving was unique among halvings in that Spot Bitcoin ETFs were approved by the SEC only a few months before the event. Investors and speculators flocked to these new ETFs or moved capital to them from the once popular Bitcoin ETF trusts.

One month after the halving, the market shifted again, and prices fell. The ETFs experienced significant outflows at the beginning of May, followed by a similar level of inflows—in mid-May, the market became more optimistic about Ether ETF while bitcoin’s price soared.

It seems that, at least for the foreseeable future, the only thing anyone can do is take a wild guess as to what the market will do.

The Bottom Line

A Bitcoin halving halves the rate at which new Bitcoins are released into circulation. The reward system is expected to continue until 2140, when the proposed limit of 21 million bitcoin is theoretically reached.

In 2009, the reward for each block in the chain that was mined was 50 bitcoins. After the first halving, it was 25, 12.5 and then 6.25 bitcoins on May 11, 2020. The reward was reduced to 3,125 when the latest halving took place on April 19, 2024.

Bitcoin halving has significant implications for its network. For miners, the halving event could result in consolidation in their ranks as individual miners and small rigs fall out of the mining ecosystem or are taken over by larger players.

The comments, opinions and analyzes expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more information. As of the date this article was written, the author does not own Bitcoin.