Review of the “Bitcoin halving”

On the night of 20 April, the fourth Bitcoin halving took place without any major incidents coming to pass. This event has led to a halving of supply inflation and an inherent increase in the shortage of issuing activity.

In concrete terms, this means that the Bitcoin network is currently “only” producing an average of 450 bitcoin per day and the cryptocurrency’s inflation rate now stands at approximately 0.85%. For the first time, Bitcoin’s rate of inflation is thus now significantly lower than that of gold, which historically has been around the 2.3% mark.

_{Since 20 April, we have been in the fifth Bitcoin epoch, in which 3.125 bitcoin are mined every ten minutes. Source: Glassnode}

Upon the implementation of this halving at block 840,000 in the Bitcoin blockchain, there were precisely 19,687,500 bitcoin in circulation, corresponding to 93.75% of the total existing supply cap of 21 million bitcoin units. This means that over the next 115 years, “only” a further 1,312,500 bitcoin units will be added.

Issuance of new bitcoin versus trading volume

To put the supply-side effect of the halving into perspective, the newly mined bitcoin should be compared with Bitcoin’s total global trading volume. These new units make up a vanishingly small proportion of today's transfer, spot and derivative volumes and currently equate to less than 0.1% of Bitcoin’s total trading volume. 

_{A comparison of the various volumes around the halving days clearly illustrates that the issuance of new Bitcoin to miners accounts for a very small share in relative terms. Source: Checkonchain}

The impact that a Bitcoin halving has on the available Bitcoin trading supply will decrease with each additional halving. This is because the number of Bitcoin units mined is decreasing, while the market capitalisation, liquidity and trading volume within the Bitcoin ecosystem are likely to increase.

Impact on the ecosystem

The most notable effect was the increase in transaction fees that went hand in hand with the halving. In order for miners in the Bitcoin network to be able to process a Bitcoin transaction, users now have to pay a fee. This not only serves as incentive for miners – the amount of the fee, which can be adjusted in line with demand at any time, also determines which transactions make it into the Bitcoin blockchain, namely those for which a user is willing to pay the most.

With the halving block, more than 37 bitcoin in transaction fees were paid to a lucky miner (ViaBTC). In comparison: in the previous block, i.e. block 839,999, the transaction fee stood at just under 1 bitcoin.

_{The Bitcoin halving block contained transaction fees totalling 37.626 bitcoin. Adding the new block reward of 3.125, total fees came to 40.751 bitcoin. Source: Mempool}

The reason for this enormous difference is as follows: with the Bitcoin halving and the 840,000th block, a new token standard called Runes was launched on Bitcoin. This makes it possible to launch fungible tokens on the Bitcoin blockchain, each of which must be written to the blockchain using a transaction fee.

Even days after the halving, the average transaction fees remained comparatively high before they declined when the Runes euphoria started cooling down. In the beginning, the Runes token standard was being used, in particular, for the market launch of various Bitcoin-based memecoins, whose purpose is likely to almost exclusively be speculation. It remains unclear whether projects such as stablecoins will also succeed in establishing themselves as Runes tokens on Bitcoin. In any case, the first trial projects are already in the starting blocks.

On the income of miners

Finally, the Bitcoin halving has a direct impact on miners. Once again, they saw their income collapse by 50% from one day to the next. In the days following the halving, however, a positive picture emerged. For example, the various publicly listed Bitcoin mining stocks, including RIOT, MARA and CLSK advanced in US dollar terms.

The expectation had been that the halving of the block reward would put miners under pressure. Immediately after the halving, however, miners were more profitable than they have been for some time. On the one hand, this was due to the hype surrounding the aforementioned Runes token. On the other, the profitability of miners had also improved due to the Bitcoin price already reaching a new all-time high prior to the Bitcoin halving and the increased spot price mitigating the decline in revenue relative to the start of the year.

It is the price correction of the last few days that is likely to put Bitcoin miners under more pressure. The so-called hash price index has now fallen to a five-year low in just a few days. The term hash price refers to the expected value of 1 TH/s of hash power per day. In this way, the metric attempts to indicate how much a miner can earn from specific quantity of hashrate.

If the hash price falls, this affects the profitability of miners. With a historically low hash price, as is currently the case, not only are many old and mid-generation Bitcoin mining machines unprofitable, but some new generation machines are hardly worthwhile either.

_{At the beginning of May, the Bitcoin hash price fell to around USD 45,000 per PH (peta hash). One day after the halving, the hash price shot up to over USD 180,000 per PH. Source: Hashrate Index}

If the hash price remains low for a longer period of time, this could have two main consequences: The bitcoin price may come under further pressure as bitcoin mining companies struggling to remain profitable sell bitcoin to cover their costs. If they fail to do so, they will have to shut down their mining equipment. As a result, the Bitcoin hashrate, i.e. the total computing power used for Bitcoin mining, would be automatically corrected downwards by the protocol, making the remaining miners more profitable again. Due to this built-in difficulty adjustment mechanism, the Bitcoin protocol can regulate itself and survive for the long term.

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Editorial deadline: May 2024

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