Konrad Rotkiewicz
min read
Last Update:
February 29, 2024

Satoshi Nakamoto laid out a groundbreaking deflationary digital currency in his Bitcoin whitepaper. There is a built-in limit to the number of Bitcoins that will ever exist (21 million). There is also a limit on the number of new Bitcoin mined each day. As of now, 18 million Bitcoin, making up 86% of the lifetime total, have been mined.

New Bitcoins are created when Bitcoin’s blockchain rewards miners for contributing computational power to the network. This computational power is used to validate Bitcoin transactions and create the next block in the sequence. Every 210,000 blocks (or roughly every four years) the reward for mining BTC is reduced by half. This is a built-in feature of Bitcoin that aims to help keep its inflation in check by making new Bitcoins more scarce as time goes on.

Block rewards

When Bitcoin started in 2009 the network rewarded 50 BTC per block reward. Since then the block reward has “halved” two times (in 2012 and 2016). Currently, 12.5 BTC is issued every block by the network. However, the third and next halving, or “halvening” as it is called by cryptocurrency enthusiasts, occured on May 11, 2020, at approximately 3:21 p.m EST when the block reward was reduced from 12.5 BTC to 6.25 BTC.

Up to 900 BTC was awarded by the network to the miners per day. 85% of all Bitcoins were mined by that time leaving only 3.15 million BTC left to be mined. Halvenings cause bitcoin creation to occur at a logarithmic rate. Although 80 percent of all Bitcoins were mined in Bitcoin’s first 10 years the final block reward won’t be released until 2140. In terms of inflation, the latest halving would shift Bitcoin from a 3.6% annual rate of inflation to an inflation rate of 1.8%. This is less than the target inflation rate for the US dollar (2%) and around the same rate as gold.

Past halvenings

The first halving

The first halving of Bitcoin’s reward per block happened on November 28, 2012. The block reward was reduced from 50 BTC to 25 BTC. 10,500,000 BTC were created between the genesis block (the launch of Bitcoin) and the 210,000’th block when the first halvening occurred. Bitcoin’s ecosystem was fragile, volatile, and tiny when the first halving occurred. Bitcoin’s price moved sideways pre, during, and after this key event until a few months later when a strong bull market erupted. This surged Bitcoin’s price, beating all-time records, up to a peak of $1300.

The 2012 halving affected Bitcoin’s network hash rate. The hash rate is a rough measure of the processing power of the Bitcoin network. In 2012 within two weeks of halving the network hash rate dropped from 27.61 THash/s to 19.98 THash/s. Then the hash rate unwaveringly increased up to 60 THash/s in the six months following.

For Bitcoin miners, profitability sank after the 2012 halving but it was able to recover in the following four months.

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The second halving

On July 9, 2016, Bitcoin’s reward block went through its second halving when it hit block 420,000. 5,250,000 BTC was generated between the first and second halvings. The network was more advanced by this time than it was when the first halving occurred. The block reward was reduced by the network from 25 BTC to 12.5 BTC per block and the daily issuance of Bitcoin went from around 3,600 BTC to 1,800 BTC per day. This is the current state of the reward block until the upcoming third halving.

There was an uptick in the price of Bitcoin in the 9 months leading up to the 2016 halving. It rose 112% over this period. At the time of the second halving, the average trading price of Bitcoin was $650 which was 52 times the level it was at the first time. The 2016 halving led Bitcoin into the legendary bull run of 2017 which saw the price of BTC rise 2,800% over 18 months and peak at just under $20,000/BTC in December of 2017.

The network hash rate dropped from 1.56 EHash/s to 1.40 EHash/s after the second halving. It then took seven months for the hash rate to recover to 3.85 EHash/s. It has become drastically less profitable to mine Bitcoin since the 2016 halving.

The third halving

The third halving of the Bitcoin block reward, the third ever, occured around in May 2020. The time it takes to generate new blocks fluctuates (but averages out to around one block every ten minutes). The third halving  happened when the block number reaches 630,000. When this happened the block reward decreased from 12.5 BTC to 6.25 BTC. Between the second and third halving, 2,625,000 BTC were being generated. Only 1,312,500 BTC will be generated between the third and fourth halving of Bitcoin, which is expected to happen in 2024.

Price change after the third halving

A question you may be wondering right now: what will happen to the price when it happens? If we take a look at the past two halvings in 2012 and 2016 respectively, we see that in the months following each the price of BTC rose. It rose over 9000% after the 2012 halving and around 288% after the 2016 halving. Some people in the crypto community are very optimistic about the idea of this pattern repeating and BTC rising again due to the 2020 event.

Dave Balter, CEO of research company Flipside Crypto, said: “as Bitcoin is often influenced by momentum thinking -- and the halving is magnified by a transformation of the economic structure -- I’d estimate it will have a positive influence on price.”

There are arguments to be made against the price of BTC rising this time as it has in the past. While the price did increase in 2016, it was nowhere near as much of a rise as in 2012. Some argue that this occurred because the community was aware of and anticipated the second halving which led to the expected price action being factored in by the time the halving occurred. To put this another way, the anticipated rise in Bitcoin’s price that seems to occur after a halving may already be fully priced-in this time.

Bitcoin is totally different today than it was in 2016 or 2012. One new financial advancement since the last halving is futures trading of BTC. Crypto data tracker Skew notes that the Bitcoin options market does not indicate increased volatility for the time of the halving which suggests that its impact is already factored into the price of BTC. In addition, the volume of Bitcoin being traded is higher than ever before.

Nic Carter is the co-founder of Coin Metrics (a crypto market tracker based in Boston). When asked about the upcoming halving he said “unlike most Bitcoiners, I don’t think the halving is particularly bullish. I am of the view that most people with a Bitcoin position understand that it’s capped in supply, so the issuance change shouldn’t make a difference. Also, the halving is perfectly forecastable, so I have a hard time believing that it constitutes an informational shock. Bitcoin supply has been described and understood from January 2009 and has followed the ordained trajectory ever since.”

Mining after the 2020 halving

It is difficult to forecast the impact the 2020 halving will have on mining BTC, just as it is difficult to forecast the price. Co-founder of JST Capital, a financial services firm that specializes in the digital asset market, Scott Freeman said that “we feel that many miners are operating profitably at current prices, but that the less efficient miners will be under pressure once the halving occurs.” It could very well be the case that small miners will be pushed out or have to upgrade their hardware to remain profitable after the reward block drops at the end of May. When the reward block decreases, mining rigs that are struggling to cover production costs will have to exit and shut down their mining operations. There will remain large crypto mining operations that stay in the game and will still be profitable but small miners dropping out might end up making the market less decentralized.

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Written by
Konrad Rotkiewicz

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