For the fourth time in history, the Bitcoin network reduced the incentives awarded to miners by half on Friday night.
The celebrated event, which occurs approximately every four years as dictated by the Bitcoin code, is intended to halt bitcoin issuance, generating a scarcity effect and allowing the cryptocurrency to retain its digital gold-like quality.
There may be some speculative trading around the event itself. JPMorgan sees some downside in bitcoin after halving, while Deutsche Bank says it “does not expect prices to increase significantly.” However, the impact could be greater months from now, even if bitcoin maintains its tendency of declining returns from its halving day to its cycle peak. The block reward and hash rate will be the two most important metrics to monitor.
“While the upcoming Bitcoin halving will create a supply shock as the previous ones had, we believe its impact on the cryptocurrency’s price could be magnified by the concurrent demand shock created by the emergence of spot bitcoin ETFs,” Mark Palmer, an analyst at Benchmark, said.
He noted that the miners will bear the brunt of the immediate damage. They operate the devices that record fresh blocks of bitcoin transactions and add them to the global database, often known as the blockchain.
“Miners with access to inexpensive, reliable power sources are well positioned to navigate the post-halving market dynamics,” said Maxim’s Matthew Galinko in a note Friday. “Some miners, many of which are not publicly traded, may abandon the market due to a lack of access to electricity, efficient machines, and finance. Miners with capital and somewhat expensive power are likely to find chances in the aftermath of probable consolidation and disruption caused by the halving.
The Block Reward
Miners have two motivations to mine: transaction fees paid voluntarily by senders (for faster settlement) and mining rewards of 3.125 freshly produced bitcoins, or around $200,000 as of Friday evening, when the mining payout was reduced from 6.25 bitcoins. The incentive was initially set at 50 bitcoins.
The reduction in block rewards reduces the quantity of bitcoin by decreasing the rate at which new coins are created, preserving the concept of bitcoin as digital gold, whose finite supply determines its value. According to the Bitcoin code, the total number of bitcoins in circulation will eventually reach 21 million. There are around 19.6 million in circulation now.
“Miners use powerful, specialized computer hardware to validate transactions on the Bitcoin network and permanently record them on the blockchain,” Deutsche Bank analyst Marion Laboure explained. “This process, called as mining, pays miners with newly created bitcoins. However, with each halving, the incentive for mining decreases in order to maintain scarcity and manage the cryptocurrency’s inflation rate over time.
The hashrate
Historically, following a halving, the Bitcoin hash rate – or the total processing power utilized by miners to process transactions on the Bitcoin network – has decreased, pricing some miners out of the market. Laboure noted that it generally recovers in the medium term.
The network hash rate has been at all-time highs for months as miners attempted to gain market share ahead of the halving. The increase in the Bitcoin hash rate dilutes individual miners’ contributions to the network hash rate.
“In the past three halvings, the network recovered its pre-halving hash rate levels within an average of 57 days,” she went on to say. “It is also likely that the current elevated prices of bitcoin may limit this short-term dip in the hash rate, as bitcoin miners enjoy record high profits in the lead-up to the halving.”
Palmer believes the impact of the halving on bitcoin miners’ economics will be “more than offset over time” if bitcoin price rallies continue to propel the cryptocurrency to new highs in the coming months.
Bitcoin just completed its fourth-ever ‘halving,’ here’s what investors need to watch now
