NEW YORK — At some point in the coming days or even hours, the “miners” who extract bitcoins from complex math will take a 50% pay cut, effectively halving new production of the world’s largest cryptocurrency.
That could have many implications, from the price of the asset to the bitcoin miners themselves. And, as with everything in the volatile cryptoverse, the future is difficult to predict.
Here’s what you need to know.
Bitcoin halving, a pre-programmed event that occurs approximately every four years, affects the production of bitcoin. Miners use farms of noisy, specialized computers to solve complex math puzzles; and if they complete one, they will receive a fixed number of bitcoins as a reward.
Halving does exactly what it sounds like: it halves the fixed income. And if the mining reward drops, the number of new bitcoins coming onto the market also drops. This means that the supply of coins available to meet demand is growing more slowly.
Limited supply is one of the key features of bitcoin. Only 21 million bitcoins will ever exist, and more than 19.5 million of them have already been mined, leaving less than 1.5 million left to draw from.
As long as demand remains the same or rises faster than supply, bitcoin prices should rise as the halving limits production. For this reason, some argue that bitcoin can combat inflation – yet experts emphasize that future profits are never guaranteed.
According to Bitcoin’s code, halving occurs after the creation of every 210,000 “blocks” – where transactions are recorded – during the mining process.
No calendar dates have been set, but that amounts to approximately once every four years. According to the latest estimates, the next halving will take place sometime late Friday or early Saturday.
Time will tell. After each of the three previous halvings, Bitcoin’s price was mixed in the first few months, but ended significantly higher a year later. But as investors well know, past performance is not an indicator of future results.
“I don’t know yet how significant we can say that the halving is already underway,” said Adam Morgan McCarthy, research analyst at Kaiko. “The sample size of three (previous halvings) is not big enough to say, ‘It’s going to go up 500% again’ or something like that.”
For example, at the time of the last halving in May 2020, the price of Bitcoin stood at around $8,602, according to CoinMarketCap – and had increased almost sevenfold to almost $56,705 by May 2021. A year after the July 2016 halving and downturn, prices almost quadrupled. a year after Bitcoin’s first halving in November 2012, it rose almost 80 times. Experts like McCarthy emphasize that other bullish market conditions have contributed to these returns.
This next halving also comes after a year of steep gains for bitcoin. As of Thursday afternoon, bitcoin was at just over $63,500 per CoinMarketCap. That’s down from last month’s all-time high of about $73,750, but still double the asset’s price from a year ago.
Much of the credit for bitcoin’s recent rally goes to the early success of a new way to invest in these assets: spot bitcoin ETFs, which were only approved by U.S. regulators in January. A research report from crypto fund manager Bitwise found that these spot ETFs saw inflows of $12.1 billion in the first quarter.
Bitwise senior crypto research analyst Ryan Rasmussen said continued or growing demand for ETFs, coupled with the “supply shock” from the upcoming halving, could help push Bitcoin’s price further.
“We expect the price of Bitcoin to perform strongly over the next twelve months,” he said. Rasmussen notes that he has seen some forecast profits as high as $400,000, but the more “consensus estimate” is closer to the $100,000-$175,000 range.
Other experts emphasize caution and point to the possibility that the gains have already been realized.
In a research note on Wednesday, JPMorgan analysts claimed they don’t expect price increases after the halving because the event is “already priced in” — noting that the market is still in overbought conditions according to their analysis of bitcoin futures.
Miners, meanwhile, will be challenged to offset the reduction in pay while keeping operating costs low.
“Even if the price of bitcoin rises slightly, (halving) could really impact a miner’s ability to pay bills,” said Andrew W. Balthazor, a Miami-based attorney who specializes in digital assets in the Netherlands. & Knight, said. “You cannot assume that Bitcoin will just go to the moon. As a business model you have to take extreme volatility into account.”
Better-prepared miners are likely to have laid the groundwork earlier, perhaps by increasing energy efficiency or raising new capital. But cracks can emerge at less efficient, struggling companies.
One likely outcome: consolidation. That’s becoming increasingly common in the bitcoin mining industry, especially after a major crypto crash in 2022.
In its recent research report, Bitwise found that miners’ total revenue fell one month after each of the three previous halvings. But those numbers had rebounded significantly after a full year – thanks to spikes in Bitcoin’s price and larger miners expanding their operations.
Time will tell how mining companies fare after this next impending halving. But Rasmussen is betting that major players will continue to expand and use the industry’s technological advances to make operations more efficient.
Establishing definitive data on the environmental impacts directly related to Bitcoin’s halving is still a bit of a question mark. But it’s no secret that crypto mining takes a lot of energy – and operations that rely on polluting sources have raised particular concerns in recent years.
Recent research published by the United Nations University and the journal Earth’s Future found that the carbon footprint of bitcoin mining in 76 countries in 2020-2021 was equivalent to the emissions from burning or running 84 billion pounds of coal of 190 natural gas-fired power stations. Coal provided the majority of Bitcoin’s electricity needs (45%), followed by natural gas (21%) and hydropower (16%).
The environmental impacts of bitcoin mining largely come down to the energy source used. Industry analysts have maintained that pressure to use more clean energy has increased in recent years, coinciding with increasing calls for climate protection from regulators around the world.
Still, production pressures could lead miners to turn to cheaper, less climate-friendly energy sources. And looking at the impending halving, JPMorgan warned that some bitcoin mining companies may also “seek to diversify into regions with low energy costs” to deploy inefficient mining rigs.