What Is Bitcoin Halving and Why It Matters for Crypto Investors (2024)

What Is Bitcoin Halving?

The Bitcoin Halving takes place about 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 raise its price if market conditions remain the same.

Block rewards are part of the blockchain's automatic process of validating transactions and opening new blocks (called mining). Miners, participants who compete in a race to solve a cryptographic puzzle, are given 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 Bitcoin halvings are considered by many to be good for the cryptocurrency's ecosystem and market value. For others, it might not be such a good thing.

Inflation

One of the key concepts behind halving the reward is to address inflation concerns. Inflation is a decrease in the amount of goods a certain amount of currency can buy at any given moment. In the U.S., inflation is measured by how much it costs to buy a basket of goods. There is an acceptable inflation rate 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 a reachable 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 to which it must be converted to be used in an economy.

Gains made regarding market value might offer inflation protection for investors, but they don't for the cryptocurrency's intended use as a payment method.

Demand

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

Investing

Bitcoin wasn't intended to be an investment. It was introduced as a payment method that attempted to remove the need to have regulatory agencies or third parties involved in transactions.

It became popular with investors once it was noted that there was the potential for gains. Investors poured into the new asset space, creating 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 places Bitcoin investing into the realm of speculation because those invested in the cryptocurrency are hoping for gains.

Mining

Miners are the people, groups, or businesses that focus on mining for its profitability. Even as Bitcoin's price fluctuated over the years, it remained a lucrative endeavor—if it hadn't, the large mining businesses wouldn't have continued operating.

However, a halving cuts mining rewards, so the endeavor becomes less profitable with each halving if prices remain the same or drop. The large-scale mining facilities needed to remain competitive require enormous amounts of money and energy. The equipment and facilities need maintenance and people to conduct it. They also need to upgrade their mining capacity to maintain their position in the industry.

For instance, Marathon Digital Holdings, one of the world's largest mining firms, increased its Bitcoin holdings to 16,930 and its fleet of Bitcoin miners to 231,000 in February 2024. This brought the firm's hash rate to 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 anticipations of the April 2024 halving and the amount of hashing power required to remain competitive while having the liquidity necessary to finance its operations.

For smaller miners, a decrease in the reward means lower chances. Miners who are part of a mining pool will likely experience smaller rewards, even if prices increase—the reward is being cut in half, but Bitcoin's price is not likely to double unless there is a drastic market event.

Consumers

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

For those using Bitcoin for remittances, a halving means the same thing as it does for shoppers. 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 fall to 1.625 BTC. The first Bitcoin block reward was 50 bitcoin. There have been four halvings since 2009. These halving dates were:

• Nov. 28, 2012, to 25 bitcoins
• July 9, 2016, to 12.5 bitcoins
• May 11, 2020, to 6.25 bitcoins
• April 19, 2024, to 3.125 bitcoins
  

As of May 2024, about 19.7 million bitcoins were in circulation, leaving just around 1.3 million to be released via mining rewards.

Should You Invest in Bitcoin During a Halving?

Many investors have high expectations for halvings because, in the past, prices generally trended upward after the event. However, the trends 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 instance, 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 from the once-popular Bitcoin ETF Trusts to them.

One month after the halving, the market shifted again, and prices dropped. 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 make a wild guess as to what the market will do.

The Bottom Line

A Bitcoin halving cuts the rate at which new Bitcoins are released into circulation in half. The rewards 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 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 occurred on April 19, 2024.

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

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own Bitcoin.