NEW YORK (AP) — “Miners” who mine complex math for bitcoins are taking a 50% pay cut, once again reducing new production of the world’s largest cryptocurrency.
Bitcoin’s latest “halving” took place on Friday evening. Shortly after this highly anticipated event, the price of Bitcoin remained stable at around $63,907.
Now all eyes are on what happens next. Beyond bitcoin’s long-term price behavior, which is highly dependent on other market conditions, experts point to potential impacts on the daily operations of miners themselves. But, as for everything in the volatile cryptoversethe future is difficult to predict.
Here’s what you need to know.
WHAT IS THE BITCOIN HALVING AND WHY IS IT IMPORTANT?
The Bitcoin “halving,” a pre-programmed event that occurs approximately every four years, impacts Bitcoin production. Miners use farms of noisy, specialized computers to solve convoluted mathematical puzzles; and when they complete one, they receive a fixed number of bitcoins as a reward.
Halving does exactly what it sounds like: it cuts fixed income securities in half. And when the mining reward decreases, the number of new bitcoins entering the market also decreases. This means that the supply of coins available to satisfy demand increases more slowly.
The limited offer is one of the key features of Bitcoin. Only 21 million bitcoins will ever exist, and over 19.5 million of them have already been mined, leaving less than 1.5 million of them.
As long as demand remains the same or increases faster than supply, bitcoin prices should rise as the halving limits production. For this reason, some argue that Bitcoin can counteract inflation. Yet experts stress that future gains are never guaranteed.
HOW OFTEN DOES HALVING OCCUR?
According to Bitcoin’s code, halving occurs after 210,000 “blocks” – where transactions are recorded – are created during the mining process.
No calendar date is set in stone, but it breaks down to about once every four years.
Will the Halving Impact the Price of Bitcoin?
Only time will tell. After each of the three previous halvings, the price of bitcoin was variable in the first few months and eventually increased significantly a year later. But as investors know, past performance is no guarantee of future results.
“I don’t know yet how significant we can say the halving is,” said Adam Morgan McCarthy, research analyst at Kaiko. “The sample size of three (previous halvings) is not big enough to say, ‘This is going to go up another 500%,’ or something like that.”
At the time of the last halving in May 2020, for example, the price of Bitcoin stood at around $8,602, according to CoinMarketCap – and increased nearly sevenfold to nearly $56,705 in May 2021. Bitcoin prices nearly quadrupled a year after the July 2016 halving, a rise of nearly 80 times in a year since bitcoin’s first halving in November 2012. Experts like McCarthy point out that other conditions Bullish market conditions contributed to these returns.
Friday’s halving also comes after a year of strong increases for bitcoin. As of Friday evening, the price of Bitcoin stood at $63,907 per CoinMarketCap. That’s down from the all-time high of around $73,750 reached last month, but still represents double the price of the asset compared to a year ago.
Much of the credit for Bitcoin’s recent rally is attributed to the early success of a new way of investing in the asset – Bitcoin Spot ETF, which were only approved by US regulators in January. A research report from crypto fund manager Bitwise found that these spot ETFs, short for exchange-traded funds, saw $12.1 billion in inflows during the first quarter.
Ryan Rasmussen, senior crypto research analyst at Bitwise, said persistent or growing demand for ETFswhen coupled with the “supply shock” resulting from the upcoming halving, could help propel the price of Bitcoin further.
“We expect Bitcoin price to show strong performance over the next 12 months,” he said. Rasmussen notes that he’s seen some predict gains as high as $400,000, but the most consensus estimate is closer to the $100,000 to $175,000 range.
Other experts emphasize caution, pointing to the possibility that gains have already been made.
In a research note published Wednesday, JPMorgan analysts said they did not expect a price increase after the halving 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 MINORS?
Miners, on the other hand, will have the challenge of compensating for reduced rewards while keeping operating costs low.
“Even if there is a slight increase in the price of bitcoin, (the halving) can really impact a miner’s ability to pay their bills,” said Andrew W. Balthazor, a lawyer based in Miami specializing in digital assets at Holland & Knight. “You can’t assume that Bitcoin will just go to the moon. As a business model, you must prepare for extreme volatility.
The best-prepared mining companies have likely laid the groundwork in advance, perhaps by increasing energy efficiency or raising new capital. But cracks may appear for less efficient and struggling companies.
One likely outcome: consolidation. This has become increasingly common in the bitcoin mining industry, especially in the wake of a major crypto crash in 2022.
In its recent research report, Bitwise found that total miner revenues fell one month after each of the three previous halvings. But these numbers have rebounded significantly after a full year – thanks to the surge in the price of bitcoin as well as the expansion of their operations by large miners.
Time will tell how mining companies will fare after this latest halving. But Rasmussen is betting that the big players will continue to expand and use the industry’s technological advancements to make their operations more efficient.
WHAT ABOUT THE ENVIRONMENT?
Identifying definitive data on the environmental impacts directly related to the bitcoin halving still remains a question mark. But it’s no secret that mining cryptocurrencies consumes a lot of energy overall – and operations relying on polluting sources have caused particular concern over the years.
A recent study published by the United Nations University and the journal Earth’s Future found that the carbon footprint of bitcoin mining in 2020-2021 in 76 countries was equivalent to emissions from burning 84 billion pounds coal or the operation of 190 natural gas power plants. Coal met the bulk of bitcoin’s electricity demand (45%), followed by natural gas (21%) and hydropower (16%).
Environmental Impacts of Bitcoin Mining largely comes down to the energy source used. Industry analysts argue that pressures for increased use of clean energy have intensified in recent years, coinciding with growing calls for climate protections from regulators around the world.
Production pressures could lead miners to seek to reduce costs. Ahead of the latest halving, JPMorgan warned that some bitcoin mining companies may “seek to diversify into regions with low energy costs” to deploy inefficient mining rigs.