The Bitcoin ‘halving’ will change crypto—again. Here’s everything you need to know

Every four years, Bitcoin undergoes a “halving,” which cuts the daily supply of newly minted coins by 50%—an event that’s historically caused prices to soar. As the next halving rapidly approaches, on or around April 19, investors are waiting to see whether this familiar pattern is repeated.

Bitcoin has already climbed 60% this year, reaching an all-time high of over $72,000 in March. This has been driven by investors flocking to newly launched ETFs that allow them to buy Bitcoin in the form of shares on a stock exchange. But it’s also likely because markets know diminished supply from the halving could rally demand, and if history repeats itself, Bitcoin could outdo its 2021 bull run by a significant margin.

Here’s Fortune’s plain English guide to the Bitcoin halving: what it is, why it matters, and how it could affect the price of the original cryptocurrency.

What is a halving?

Every time a new block is added to the Bitcoin blockchain, the contributor is given some Bitcoins as a reward. This “block reward” initially consisted of 50 bitcoins but, due to a feature of Bitcoin’s code, that amount is cut in half every four years.

Previous halvings saw the block reward cut to 25 Bitcoins, then to 12.5, then to the current allotment of 6.25. The halving set for April will see the reward cut to 3.125.

Who’s adding these blocks to the Bitcoin blockchain in the first place?

Blocks are added by miners, which typically fall into three categories: retail (individuals with computers), industrial (often publicly traded, operating data farms), and mining pools (groups of miners who combine efforts over a network).

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Anyone can be a miner and eligible for rewards—which are issued every 10 minutes or so—if they download the Bitcoin program and run it on their computers.

Rewards go to whomever is first to solve a complex math problem using trial-and-error calculations on a specialized computer. The mining is an integral part of updating transactions on the Bitcoin blockchain and keeping the network secure.

When are halvings?

Halvings occur after 210,000 blocks are created—roughly every four years. It’s not possible to predict the exact time because, due the nature of the race to solve the math problems, the new blocks don’t arrive at fixed intervals. But it’s possible to make a good guess, and the current estimate is April 19.

Have they happened before?

Yes, there have been three: Nov. 28, 2012, July 9, 2016, and May 11, 2020.

Will halvings go on forever?

No. The reward will continue to diminish until it reaches one satoshi, equivalent to 0.00000001 Bitcoin.

Bitcoin’s source code will only ever produce 21 million coins. The majority—about 19 million—have already been mined. The process is expected to continue until the year 2140.

Why does it occur?

Bitcoin’s pseudonymous founder, Satoshi Nakamoto, set out the halving mechanism in the currency’s 2008 white paper. Halvings are intended to keep Bitcoin inflation-resistant by slowing the rate at which new coins are created. For instance, currently, 328,500 Bitcoins are created each year, which will soon drop to 164,250.

“The current wage inflation rate of Bitcoin is more or less equivalent to that of gold, at 1.8%. But after the halving, it will decline to 0.85% per year, which will act as a timely reminder of Bitcoin’s scarcity,” Vetle Lunde, a senior analyst at K33, told Fortune. Because Bitcoin continually becomes scarcer, it’s a deflationary asset, which is attractive to many investors.

What does this mean for Bitcoin’s price?

So far, every halving has coincided with a bull run, Laurence Smith, a senior market strategist at Consensys, told Fortune.

Following the previous halvings, the price climbed 8,760% to $1,152, then 2,570% to $17,760, and finally 594% to $67,549 by the following year.

Why?

Supply goes down, demand goes up. But prices usually start trending upward before the event itself.

During the previous three halvings, Bitcoin saw an average increase of 14% in the two months before the event, adds Lunde. There are two main reasons.

Firstly, miners are selling less Bitcoin in the run-up. From January to November of last year, miners held onto 2.5%, but since December that figure’s grown to approximately 30%. Miners are building a “war chest” to can cash in at the right time, once production costs go up, Lunde says.

Ahead of the halving, “we’re certainly HODL-ing the vast majority of our Bitcoin,” Fred Thiel, CEO of the publicly traded mine Marathon Digital Holdings, told Fortune.

Secondly, there’s the “buy the rumor, sell the news” investors who will help push prices upward until mid-April, says Cory Klippsten, CEO of Swan Bitcoin.

What about long-term price changes?

Historically, the best day to sell Bitcoin is 500 days after the halving, Markus Thielen, founder and head of 10x Research, told Fortune. Additionally, Robert Le, a crypto analyst at PitchBook, notes how there’s been a full bear-to-bull cycle every four years, with the lowest end always increasing. “The bottom of the bear market is always the previous market’s high,” he said.

So…will April be bullish?

Not exactly.

Firstly, it’s worth remembering that each successive halving has a diminishing impact on the new supply of Bitcoin. “Market demand—or the absence of it—now plays a more pivotal role in driving Bitcoin’s price than the reduction in the rate of new Bitcoins created,” says Klippsten.

Secondly, there’s the impact of rising production costs. In the past, the cost has acted as a lower bound for Bitcoin prices, and JPMorgan analysts predicted it will rise—on average—to $42,000 after the halving. “This estimate is also the level we envisage Bitcoin prices drifting towards once Bitcoin-halving-induced euphoria subsides after April,” the analysts wrote in a recent report. Klippsten also expects to see this April price drop but is optimistic it will be fleeting.

Lastly, things are simply unfolding in a new way this time round, thanks to the new ETFs. The cycle is already performing “really different” to the previous three halvings, with the all-time high happening nearing two months before the event, Matteo Greco, an analyst at Fineqia International, told Fortune.

“It’s not something that historically has happened before,” he said, adding that Bitcoin typically peaks six to 12 months after a halving. It’s unclear how the ETF inflows coinciding with a drop in hashrate could pan out.

What’s hashrate?

Hashrate is the total computational power being used to mine Bitcoin, measured in EH/s—exhash per second, which refers to the speed computers are guessing a number. Put simply, it’s the number of guesses per second by all computers on the network. The more powerful a computer, the greater portion of the network’s hashrate it occupies.

With each halving, the hashrate has increased because more powerful computers have been required to correctly solve the math problems. For example, the hashrate has risen from 2 EH/s the week before the 2016 halving to around 600.92 EH/s today.

What’s next for miners?

Miners seeking to continue operations will have to keep investing in more powerful computers—and, wherever possible, lower their electricity costs. But the reality, experts told Fortune, is that for many miners, their days are numbered.

“We expect consolidation,” Fred Thiel, CEO of the world’s largest mine, Marathon Digital Holdings, told Fortune. About 10% to 25% of miners—likely smaller players—will come offline at some point, he said.

“It’s a very, very difficult time for the pools,” Kristian Csepcsar, chief marketing officer at mining pool Braiins, told Fortune.

Adam Ortfolf, a retail miner from Colorado who operates computers from his garage, told Fortune that during the 2022 downturn, he simply turned his machines off and placed them on a shelf.

“If it gets to where it’s not profitable,” he added, “unlike the really big miners, I can just turn them off.”

This story was originally featured on Fortune.com

Source: finance.yahoo.com