Bitcoin's next 'halving' is right around corner

NEW YORK: In the coming days or even hours, the 'miners' who carve bitcoins out of complex mathematics are set to take a 50% pay cut — effectively halving the production of the world's largest cryptocurrency. This could have numerous implications, from the price of the asset to the bitcoin miners themselves. As with everything in the unpredictable world of cryptocurrency, the future is difficult to forecast.

What is Bitcoin Halving and Why Does it Matter?

Bitcoin 'halving' is a preprogrammed event that occurs approximately every four years and affects the production of bitcoin. Miners use farms of noisy, specialised computers to solve complex mathematical puzzles; when they complete one, they receive a fixed number of bitcoins as a reward. 

Halving does exactly what it sounds like — it halves that fixed income. When the mining reward decreases, so does the number of new bitcoins entering the market. This means the supply of coins available to meet demand grows more slowly.

Limited supply is one of bitcoin's key features. Only 21 million bitcoins will ever exist, and more than 19.5 million of them have already been mined, leaving fewer than 1.5 million left to extract.

As long as demand remains the same or increases faster than supply, bitcoin prices should rise as halving limits output. Because of this, some argue that bitcoin can counteract inflation — however, experts stress that future gains are never guaranteed.

How Often Does Halving Occur?

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 are set in stone, but this works out to roughly once every four years. The latest estimates expect the next halving to occur sometime late Friday or early Saturday.

Will Halving Impact Bitcoin's Price?

Only time will tell. Following each of the three previous halvings, the price of bitcoin was mixed in the first few months and ended up significantly higher one year later. But as investors well know, past performance is not an indicator of future results.

"I don't know how significant we can say halving is just yet," said Adam Morgan McCarthy, a research analyst at Kaiko. "The sample size of three (previous halvings) isn't big enough to say 'It's going to go up 500% again,' or something."

At the time of the last halving in May 2020, for example, bitcoin's price stood at around $8,602, according to CoinMarketCap — and climbed almost seven-fold to nearly $56,705 by May 2021. Bitcoin prices nearly quadrupled a year after July 2016's halving and shot up by almost 80 times one year out from bitcoin's first halving in November 2012. Experts like McCarthy stress that other bullish market conditions contributed to those returns.

This next halving also arrives after a year of steep increases for bitcoin. As of Thursday afternoon, bitcoin stood at just over $63,500 per CoinMarketCap. That's down from the all-time-high of about $73,750 hit last month, but still double the asset's price from a year ago.

Much of the credit for bitcoin's recent rally is given to the early success of a new way to invest in the asset — spot bitcoin ETFs, which were only approved by US regulators in January. A research report from crypto fund manager Bitwise found that these spot ETFs saw $12.1 billion in inflows during the first quarter.

Bitwise senior crypto research analyst Ryan Rasmussen said persistent or growing ETF demand, when paired with the "supply shock" resulting from the coming halving, could help propel bitcoin's price further.

"We would expect the price of Bitcoin to have a strong performance over the next 12 months," he said. Rasmussen notes that he's seen some predict gains reaching as high as $400,000, but the more "consensus estimate" is closer to the $100,000-$175,000 range.
Other experts urge caution, pointing to the possibility that the gains have already been realised. In a research note on Wednesday, analysts at JPMorgan maintained that they don't expect to see post-halving price increases because the event "has already been priced in" — noting that the market is still in overbought conditions according to their analysis of bitcoin futures.

What about Miners?

Miners, meanwhile, will face the challenge of compensating for the reduction in rewards while also keeping operating costs down. "Even if there's a slight increase in bitcoin price, (halving) can significantly impact a miner's ability to pay bills," said Andrew W. Balthazor, a Miami-based attorney who specialises in digital assets at Holland & Knight. "You can't assume that bitcoin is just going to go to the moon. As your business model, you have to plan for extreme volatility."

Better-prepared miners have likely prepared ahead of time, perhaps by increasing energy efficiency or raising new capital. However, cracks may appear for less-efficient, struggling firms.

One likely outcome is consolidation. This has become increasingly common in the bitcoin mining industry, particularly following a major crypto crash in 2022.

In its recent research report, Bitwise found that total miner revenue slumped one month after each of the three previous halvings. But those figures had rebounded significantly after a full year — thanks to spikes in the price of bitcoin as well as larger miners expanding their operations.

Time will tell how mining companies fare following this next looming halving. But Rasmussen is betting that big players will continue to expand and utilise the industry's technological advances to make operations more efficient.

What about the Environment?

Pinpointing definitive data on the environmental impacts directly tied to bitcoin halving is still somewhat uncertain. But it's no secret that crypto mining consumes a lot of energy — and operations relying on pollutive sources have drawn particular concern over the years.

Recent research published by the United Nations University and Earth's Future journal found that the carbon footprint of 2020-2021 bitcoin mining across 76 nations was equivalent to emissions from burning 84 billion pounds of coal or running 190 natural gas-fired power plants. Coal satisfied the majority of bitcoin's electricity demands (45%), followed by natural gas (21%) and hydropower (16%).

The environmental impacts of bitcoin mining largely boil down to the energy source used. Industry analysts have maintained that pushes towards the use of more clean energy have increased in recent years, coinciding with rising calls for climate protection from regulators around the world.

Still, production pressures could result in miners turning to cheaper, less climate-friendly energy sources. And when looking towards the looming halving, JPMorgan cautioned that some bitcoin mining firms may also "look to diversify into low energy cost regions" to deploy inefficient mining rigs.

By RSS/AP