MW Here is everything you need to know about the bitcoin halving
By Joseph Adinolfi
What is it, when will it happen, why is it necessary, and what impact will it have on the price of bitcoin?
Bitcoin is about to undergo its fourth "halving" since the cryptocurrency was officially launched in January 2009. But what does that mean, exactly?
Those who aren't familiar with how the Bitcoin network functions might have questions: What is the halving, when will it happen, why is it necessary, and what impact could it have on the price of bitcoin?
Let's start with what it is.
What is the halving?
Bitcoin was designed by its creator, Satoshi Nakamoto, to have a fixed supply, differentiating it with fiat currencies like the U.S. dollar.
According to the rules set out in the Bitcoin protocol's code, only 21 million bitcoin (BTCUSD) will ever exist. The last of these is due to be mined around the year 2140, bitcoin experts say.
Right now, miners who win the race to mine blocks are rewarded with 6.25 tokens. After the halving, that reward will drop to 3.125 tokens. Bitcoins are divisible into smaller units, with the smallest being a "Satoshi," or one-hundred-millionth of a bitcoin.
Why is it necessary?
Bitcoin miners power the Bitcoin network by racing against one another to solve complex cryptographic puzzles. In doing so, they validate each transaction by consensus, and ensure the security and integrity of the Bitcoin blockchain.
Every time a miner succeeds in mining a new block of the Bitcoin blockchain, they are rewarded with a set number of tokens. These awards were devised as a way to incentivize miners to power the Bitcoin network.
In the early days of bitcoin, miners could earn tokens by simply running a software node on their laptops. But as competition has grown more intense, miners must now employ powerful computers that require large amounts of energy to remain competitive.
But in order to fulfill bitcoin's promise as a deflationary asset, the rewards that miners receive must decrease over time, in order to limit the supply of the cryptocurrency.
"The primary purpose of halving is to control bitcoin's supply, creating a deflationary economic environment," said Matt Weller, global head of research at FOREX.com and City Index, in commentary emailed to MarketWatch. "By slowing the rate at which new bitcoins are created, halving helps to maintain scarcity and potentially increase the cryptocurrency's value, assuming demand remains steady or increases."
When will it happen?
Nobody can say for certain when the halving will occur, but it will happen after the 840,000th block of the Bitcoin blockchain is completed, according to Ali Dhanani, a technology partner at law firm Baker Botts.
According to blockchain.com, the Bitcoin blockchain was on its 839,400th block (and counting) as of Monday evening. If one block is mined roughly every 10 minutes, which is about average, according to Dhanani, that means the halving will happen in about 4.3 days from Monday evening. That would peg it at either late Friday evening or early Saturday morning, Eastern time.
The reward that miners receive for completing a block in the blockchain is cut in half every 210,000 blocks. In the past, this has taken about four years, on average. The first halving took place on Nov. 26, 2012; the second occurred on July 11, 2016; and the third happened on May 11, 2020.
How might it impact bitcoin's price?
In the past, the halving's impact on the price of bitcoin has been muted, at least initially. But as Weller illustrates in the chart below, previous halvings have preceded the start of bitcoin boom cycles by a few months
Theoretically, the impact of the halving on bitcoin's price has likely already been incorporated, since the approximate date has been known well in advance, Weller said.
But there is one interesting wrinkle this time around: Never has a bitcoin halving followed so soon after the cryptocurrency traded at a record high. The imminent halving has been cited by analysts as a possible driver of this year's crypto-market gains.
The other reasons typically cited for bitcoin's advance include the Federal Reserve teasing interest-rate cuts in 2024, and the introduction earlier this year of 11 exchange-traded funds that can buy and hold bitcoin directly. Previously, bitcoin ETFs were limited to trading futures contracts pegged to the cryptocurrency.
Spot bitcoin ETFs now have nearly $60 billion in assets, according to FactSet, including $22 billion in the Grayscale Bitcoin Trust GBTC, which recently converted to an ETF from a closed-end fund.
Yet bitcoin's price has slipped from its record high reached last month. The crypto's value had fallen to around $63,200 as of late Monday from north of $73,700 in mid-March, a roughly 14% drop, according to FactSet data.
So far, it appears the halving has had a bigger impact on the value of bitcoin miners like Marathon Digital Holdings Inc. (MARA) The company's stock is down more than 35% this year to date, to $15.15 as of Monday's close. Other miners have also seen their shares decline since the start of the year - including Riot Platforms Inc. (RIOT), which has fallen nearly 45% in 2024, to $8.57 as of Monday.
That's understandable, since the halving makes it more difficult for bitcoin miners to make money by reducing one of their two main revenue streams (the other being transaction fees).
-Joseph Adinolfi
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 16, 2024 06:00 ET (10:00 GMT)
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