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On Friday night, the Bitcoin network halved the rewards given to miners for the fourth time since its inception. This anticipated event occurs roughly every four years as per the Bitcoin protocol, aiming to reduce the rate of Bitcoin issuance. This creates a scarcity, reinforcing Bitcoin’s digital gold-like nature.
Speculative trading surrounding the event is anticipated. JPMorgan predicts potential downside for Bitcoin post-halving, while Deutsche Bank suggests no significant price surge. Yet, the true impact might unfold over the coming months, especially considering Bitcoin’s historical pattern of diminishing returns from halving to cycle peak. Key indicators to monitor include the block reward and hash rate.
“Although the forthcoming Bitcoin halving will induce a supply shock similar to past events, we anticipate its influence on the cryptocurrency’s price could be intensified by the simultaneous demand shock from the introduction of spot Bitcoin ETFs,” remarked Mark Palmer from Benchmark. He emphasized that the most immediate effects will likely be felt by the miners. These miners operate the machinery responsible for validating new Bitcoin transactions and incorporating them into the overarching blockchain ledger.
In a note on Friday, Maxim’s Matthew Galinko pointed out that miners who have access to affordable and dependable power sources are likely to fare well in the post-halving market landscape. He suggested that certain miners, particularly those not publicly traded, might leave the market due to challenges like inadequate power access, less efficient machinery, and limited capital. On the other hand, miners with sufficient capital but higher power costs could find new opportunities arising from possible industry consolidation and disruptions stemming from the halving.
The decrease in block rewards slows down the creation of new bitcoins, effectively curbing the supply. This feature aligns with Bitcoin’s portrayal as digital gold, with its finite supply playing a crucial role in determining its value. According to the Bitcoin code, the total number of bitcoins in circulation will eventually reach a maximum of 21 million. As of today, approximately 19.6 million bitcoins are already in circulation.
Miners employ specialized and robust computer hardware to verify transactions on the Bitcoin network and permanently log them on the blockchain,” explained Deutsche Bank analyst Marion Laboure. “This mining process earns miners newly generated bitcoins. However, each halving reduces the mining reward, ensuring scarcity and managing the cryptocurrency’s inflation rate in the long run.
Historically, following a halving, the Bitcoin hash rate, representing the total computational power miners employ to process transactions, has decreased, causing some miners to exit the market due to profitability concerns. Nonetheless, as Laboure highlighted, it typically rebounds in the medium term. In the months leading up to the halving, the network hash rate reached record levels as miners competed to expand their market share. This growth in the Bitcoin hash rate diminishes the individual impact of miners on the overall network hash rate.
“In the previous three halvings, the network typically regained its pre-halving hash rate levels in an average of 57 days,” she noted. “The current high bitcoin prices may also mitigate this short-term decline in the hash rate, given that bitcoin miners are experiencing unprecedented profits leading up to the halving.” Palmer suggested that the halving’s economic effects on bitcoin miners could be “largely compensated for over time” if continuous price surges propel the cryptocurrency to new peaks in the upcoming months.
