Bitcoin is set to undergo its fourth halving on April 20th, reducing the block reward from 6.25 BTC to 3.125 BTC every 210,000 blocks. The halving will impact miners’ profitability but will also incentivize more efficient mining operations, with transaction fees becoming increasingly important. Bitcoin’s price has historically seen significant increases following each halving, which occurs approximately every four years. While ETF demand and other factors may influence Bitcoin’s price, the halving represents a predictable monetary rhythm. Bitcoin’s scarcity and deflationary nature make it a unique asset, constantly innovating to prepare for the next phase of growth.
Title: Bitcoin’s 4th Halving
Authors: Tanay Ved & Matías Andrade
Source: Coinmetrics
Translation: Kate, Huoxing Finance
Key Points:
– Bitcoin will undergo its fourth halving at 840,000 blocks (expected on April 20th), reducing the block reward from 6.25 BTC to 3.125 BTC.
– The reduced issuance will put pressure on miners’ profitability, leading to more efficient mining operations, with transaction fee revenue becoming increasingly important.
– Continued or increased demand for Bitcoin may offset forced selling, reducing issuance and driving price trends.
Introduction:
In the current environment of macroeconomic uncertainty, ongoing inflation, imminent Federal Fund rate cuts, the ripple effect of upcoming election cycles, geopolitical tensions, and record debt levels, one event stands out as a beacon of certainty: Bitcoin’s fourth halving. With the mining of the first block (genesis block) in 2009, Bitcoin was born as a scarce, decentralized digital currency, with a predetermined monetary policy, predictable inflation rate, and a fixed supply of 21 million Bitcoins. This week, the Bitcoin network will experience its fourth halving in its 15-year existence – an event of critical importance to its economic policy and value proposition on the global stage.
In this edition of Coin Metrics’ Network State, we explore the significance of Bitcoin halving, its impact on key stakeholders in the ecosystem, and the potential influence on Bitcoin’s price as the fourth halving approaches.
The Significance of “Halving”:
Each halving event is a pivotal moment in Bitcoin’s lifecycle as it directly affects Bitcoin’s issuance and inflation rate, reducing the block reward (newly minted Bitcoins incentivizing miners to produce blocks and secure the network), and potentially impacting the market value of Bitcoin due to increased scarcity.
As the name suggests, “halving” refers to a 50% reduction in Bitcoin’s issuance, effectively halving the Bitcoin inflation rate (the speed at which new Bitcoins enter the market). With this halving, the Bitcoin issuance will decrease from 900 Bitcoins per day (1.8% issuance) to 450 Bitcoins per day (0.9% issuance). Consequently, miners’ rewards for validating new blocks and securing the network, excluding fees, will also be halved, affecting their incentives and profitability (detailed in the next section). Halvings are set to occur approximately every 210,000 blocks, or roughly every four years, and are immutable – the rules governing this process are etched into the code supporting the Bitcoin network.
Source: Coin Metrics Formula Builder
Bitcoin’s monetary policy is depicted in the above chart. Since its inception in 2009, the network has experienced three halvings, each halving the block reward for miners. The first halving in November 2012 reduced the reward from 50 BTC to 25 BTC, followed by the second in July 2016 (25 BTC to 12.5 BTC), and the most recent in May 2020 (12.5 BTC to 6.25 BTC). The upcoming halving is expected to occur at block 840,000 on April 20th, further reducing the block reward to 3.125 BTC.
Source: Bitcoin Halving Countdown Dashboard
However, as Bitcoin progresses on this timeline, with decreasing issuance rates and 19.7 million out of the 21 million upper supply limit already mined, each halving will have a diminishing effect on the overall supply. Thus, the importance of future halvings will gradually diminish as Bitcoin approaches its limited supply.
Mining Economics and Incentives:
Miners play an integral role in the Bitcoin ecosystem, serving as the pillars of blockchain security and integrity. They use computational power from specialized hardware to hash transaction data, searching for a random number (a solution to the hash function), which, when found, validates a new block and adds it to the Bitcoin blockchain. For a deeper understanding of hash functions and random numbers as the basis of Bitcoin’s Proof of Work (PoW), please refer to our primer on hashes.
As a reward for their computational work, miners receive block rewards (block subsidies), which include a predetermined amount of newly minted Bitcoins and transaction fees included in the blocks.
Source: Coin Metrics Network Data Pro
Block subsidies are the primary economic incentive for miners. However, with this reward being reduced from 6.25 BTC to 3.125 BTC, miners will face a stress test as a significant source of income is diminished. As a result, transaction fees are expected to play an increasingly important role in miners’ revenue, while also appreciating in value as Bitcoin demand increases.
Since the third halving, Bitcoin income from block subsidies has surged to $4.3 billion, a 180% increase from the previous halving in 2016. While transaction fees currently account for a small proportion of miners’ total revenue, their importance has grown with each halving, with fee-based revenue doubling compared to the previous halving, reaching $2.5 billion.
Source: Coin Metrics Network Data Pro
Total mining revenue continues to reach new heights, with block rewards bringing in over $76 million in a single day on March 11th, setting a new record. Although block subsidies will decrease in terms of Bitcoin, the appreciation in Bitcoin’s market value offsets this decline, resulting in more income for miners in terms of US dollars. With Bitcoin performing strongly earlier this year, miners hope this trend will continue after the halving.
Additionally, Ordinals can embed data such as images, videos, and text into non-fungible tokens, further increasing transaction fees for miners. In the first quarter of 2024, miners averaged $3 million per day in transaction fees, significantly higher than historical norms. In fact, fee revenue surged to $17 million and $24 million in May and December 2023, respectively, accounting for nearly 40% of miners’ total fee revenue at the time. With the upcoming release of “Runes” – fungible tokens on the Bitcoin network – along with the halving, miners can expect transaction fee income to play a more significant role in their overall revenue.Miners may see an increase in revenue based on transaction fees, which could offset the impact of decreased block subsidies.
The profitability of mining is intricately linked to the efficiency of the mining hardware used and the cost of electricity needed to power it. The provided ASIC breakeven power consumption chart illustrates this relationship, showing the maximum electricity cost (in kilowatt-hours) that different ASIC models can sustain profitability in Bitcoin mining.
Newer ASIC models, such as the Antminer S19 and S19 XP, are profitable compared to older models like the S9 and S17 when the electricity cost is below $0.13/kWh and $0.20/kWh, respectively. This is because advancements in ASIC design have resulted in more energy-efficient miners, allowing profitable mining operations at higher electricity costs. However, this metric is halved, rendering these models unprofitable even at $0.08/kWh (the average industrial rate in the US). As the fourth Bitcoin halving approaches, miners with the most efficient hardware and cheapest electricity will be better equipped to withstand the reduction in block rewards.
Therefore, mining companies have been employing various strategies such as partnering with renewable energy suppliers, operating near cheaper and sustainable energy sources, implementing advanced cooling techniques, and utilizing stranded energy to improve sustainability and profitability. Those burdened with older and less efficient hardware will find it increasingly challenging to maintain profitable operations, potentially leading to consolidation of mining power among the most efficient operators and gradual phasing out of less efficient ASICs from the network.
This, in turn, may affect the hash rate, which measures the computational resources allocated to mining. Prior to the halving, Bitcoin’s hash rate had grown to 605 EH/s. However, after the halving, the hash rate typically experiences a temporary decline due to offline less efficient hardware. To maintain the target block time of 10 minutes, the decrease in hash rate may result in a downward adjustment of Bitcoin’s difficulty, mitigating the hashing process under changing conditions.
Impact of Demand-Driven Factors
While the halving is a supply-side event, the dampening effect of issuance suggests that demand plays a crucial role in driving the market value of Bitcoin and other assets with limited supply elasticity. The introduction of the physically-backed Bitcoin ETF in January catalyzed significant new demand and altered the dynamics of the Bitcoin market compared to previous halving cycles. Ongoing inflows of funds into US and recently approved Hong Kong Bitcoin exchange-traded products, as well as other demand sources like funds, corporate balance sheet holdings, and smart contracts, will help absorb the pressure from forced selling and new issuance supply more efficiently.
Price Dynamics
As with every halving, a core question on everyone’s mind is: how will the halving affect the price of Bitcoin? While we can glean some insights from the performance of previous halving cycles, they may not directly indicate future outcomes. Considering that we have only experienced three halvings before in different market conditions and with different investor backgrounds, despite it being a well-known event in advance, predicting whether the stock price has already been reflected in the price may be misleading.
The price of Bitcoin tends to follow a four-year cycle. If we look back at each halving period, the price of Bitcoin saw significant gains in the year following each halving event. Prior to the first halving in 2012, Bitcoin had generated returns exceeding 14,000%. Following the first and second halvings, the price of Bitcoin increased by 5,100% and 1,200% respectively, eventually reaching new all-time highs around 500 days after the halving. In the current era leading up to the fourth halving, as of April 15th, we have already seen an appreciation of 664%, with BTC hitting a new all-time high of $73,000 before the first halving.
The demand sparked by the ETF and subsequent attention has led to a slightly different dynamic and promises to play a greater role in the future. Several other factors could also drive growth on the demand side, such as broader macroeconomic and liquidity changes, regulatory shifts, the growth of global digital asset adoption, and speculative behavior, all of which could influence the price trajectory of Bitcoin.
The above historical price chart illustrates the resilience of Bitcoin price trajectory. Although the price has experienced pullbacks of over 70% from historical highs during halving cycles, it has rebounded and made new highs at the start of each cycle. As the fourth halving approaches, while Bitcoin has already reached new all-time highs even before the halving, it is important to consider price volatility, which may be due to external conditions or increased attention and speculation surrounding the halving itself.
Conclusion
The Bitcoin halving embodies a predictable monetary rhythm in an uncertain financial environment. Bitcoin’s inherent scarcity and deflationary nature make it a unique asset in various economic cycles. While the reduction in block rewards will bring pressure to miners, it will drive them towards more efficient and sustainable operations. The confluence of this supply-side event and strong demand-driven factors indicates that Bitcoin is ready to enter the next phase of growth. Bitcoin is not lacking in innovation—with upcoming runes and Bitcoin L2, improving transaction fees and scalability, Bitcoin is well-prepared for the next era.
To stay updated on Bitcoin mining dynamics, ASIC dominance, and real-time countdown to the fourth Bitcoin halving, please visit our Bitcoin Mining Dashboard.
Network Data Insights
Bitcoin’s active addresses decreased by 10%, while Ethereum’s remained unchanged over the past week.
Uniswap received a Wells notice from the U.S. Securities and Exchange Commission (SEC), and despite an increase in trading volume, its market value declined by 19%.
Tags
DATA
Uniswap
Ethereum
Halving
Mining
Bitcoin
Bitcoin Halving
Bitcoin Halving Market Trends
Source: https://news.marsbit.cc/20240417101035107280.html
Disclaimer: The views expressed in this article are solely those of the author and do not constitute investment advice.
Original article link: https://www.bitpush.news/articles/6616824
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