Bitcoin’s halving events are when the block reward issuance is sliced in half every 210,000 blocks, which equates to roughly every four years. An integral part of Bitcoin’s overall economic and incentive structure, the halving events are the pivotal moment that is the manifestation of Bitcoin’s deflationary stature — with its capped supply at 21 million BTC.
As a result, halving events are debated continuously, projecting their consequences on the broader Bitcoin ecosystem, particularly with its spot price and downstream impact on the mining market.
The next halving event is slated for May 2020, where the block subsidy will be reduced from 12.5 BTC per block to 6.25 BTC. As we move closer to the date, there are numerous narratives and potential outcomes that are surfacing, and ultimately, indicate that the next halving event is perhaps the most important yet.
Market Pricing The Halvening & Mining Consequences
There are currently around 18 million BTC that have been produced via the steadfast tick of Bitcoin’s mining algorithm and block issuance. Initial block rewards in Bitcoin began at 50 BTC per block, before cutting down to 25, and subsequently 12.5, where we currently sit.
Many crypto proponents and observers correlate halving events with positive price movements in Bitcoin. Indeed, the last two events have sparked Bitcoin’s largest price bull runs in its history.
The increasing scarcity of bitcoins over the years corresponds to its narrative of a store of value with a high stock-to-flow ratio, which some analyses detail as the primary driving cause in Bitcoin’s value. Halving events are priced into Bitcoin long before the moment itself, however, as value-aware traders and investors will tend to project the impact that it will have before it actually happens.
Investor speculation on the price of Bitcoin aside, long-term price movements fueled by halving events play a significant role in Bitcoin’s mining market. To better understand its impact, it’s important to first examine a hasty bit of mining history for some context.
In Bitcoin’s early stages, miners could extract Bitcoin using a CPU, which is not the case anymore. As more interested parties and businesses gravitated to the mining market, the development of specially designed hardware chips, ASICs, emerged to produce better marginal returns on investment. This is a direct result of Bitcoin’s difficulty adjustment, which scales with network hash power and requires higher-powered computation to produce any soluble returns. Soon enough, CPUs were all but made obsolete in the mining of Bitcoin, and are not profitable or feasible to use anymore.
However, GPU mining, with the likes of powerful consumer graphic card chips, is still technically feasible, albeit not really worth the time or investment. And that just mostly leaves ASIC miners.
Hobbyist, independent “retail” miners that set up their own ASIC rigs and operate them within larger mining pools still comprise a solid portion of Bitcoin mining. However, that is changing as the industry becomes more mature and institutionalized. And the next halving event should only serve to accelerate that notion.
For example, the reduction in Bitcoin’s block reward will significantly diminish returns for miners by cutting profits, since cumulative fees currently only account for 6.6 percent of miner revenue, according to CoinMetrics. With reduced block rewards, older versions of ASICs will be squeezed out of the market due to efficiency drags compared to their newer counterparts. Retail ASIC miners will struggle to maintain parity with larger mining firms that use advanced cooling methods, operate with economies of scale, and have major VC firms backing them.
Eventually, retail miners will be squeezed out entirely, and Bitcoin’s mining market will become fully industrialized with vertical integration of mining the standard among leading firms.
In a perfectly adaptive market, the fee market would scale appropriately (i.e., extremely quickly), and upwards price movements would make each per unit Bitcoin more valuable following halving events, reconciling lost profit miner revenue from the halving event. However, this is unlikely to be realized in the short-term, causing the next halving event to have an outsized impact (more than the previous 3) on Bitcoin’s mining industry.
And that doesn’t even take into account Bitcoin’s security model coupled to mining.
The declining block subsidy in Bitcoin has been hotly debated for years within the context of its overall security model. Bitcoin’s design necessarily incentivizes miners to act honestly through a series of clever mechanisms, but whether or not a healthy fee market will develop once Bitcoin’s block subsidy decreases further over the ensuing decades is a point of contention in crypto circles.
Eventually, Bitcoin’s security model will have to transition entirely to a fee-based security model, since the block subsidy will have reached zero once the supply cap is hit around the year 2150. Interestingly, as the block subsidy diminishes towards that end, and if Bitcoin’s price doesn’t continue its upward trajectory (e.g., it stabilizes), each successive halving event will ultimately shed more light on what a gradually increasing fee market for Bitcoin’s security would look like.
The upcoming halving event is the most significant yet because it coincides with a pivotal moment for Bitcoin from a much broader perspective. Institutional investment looms, mining firms are going public, hardware innovation will only accelerate, and global geopolitical turmoil is presenting Bitcoin as a potential safe-haven asset.
Tether those narratives to the potential widescale adoption of Bitcoin, with layer two networks flourishing, and it’s not difficult to imagine that Bitcoin’s on-chain transactions will bring hefty fees while most financial activity occurs off the primary chain.
Only time will tell how Bitcoin’s security and mining market will be impacted by the decreasing block subsidy, but one thing is clear — the next halving event should be the most revealing yet.