The Bitcoin halving

11 May 2020

Yesterday at 21:23:23 block number 629.999 was mined on the Bitcoin blockchain with a 12,5 Bitcoin block subsidy. This block marked the final block before the halving taking place and the last time the block subsidy has ever been in the double digits. At 21:23:43, a mere 20 seconds after the previous block, block number 630.000 was mined. This was the first block with the new 6,25 Bitcoin block subsidy. This marked the first block with the subsidy for the next 210.000 blocks (~4 years). The halving has taken place yet again. Despite one of the biggest health crisis ever and all the macro economic turmoil in the world around us. This marks an important event, perhaps now even more so, for Bitcoin, our industry and digital assets as a new asset class.

Let’s kick this off with a brief refresher on what the block subsidy is and what the halving is. The block subsidy is the (financial) compensation miners receive for their work on securing the Bitcoin blockchain. This compensation is in Bitcoin itself and is part of every new block that is mined by the miners. The miner that finds the most recent block receives the block subsidy, this is their incentive to conduct this work. The halving refers to a 50% reduction of the block subsidy embedded in every new block. The block subsidy started out at 50 Bitcoin per block when Bitcoin was launched in 2009. Since then the subsidy has been reduced by 50% (also known as the halving) every 210.000 blocks. This means the block subsidy was halved to 25 in 2012 and to 12,5 in 2016. It has gone from 12,5 to 6,25 in 2020. The implication of this is a large part of the (deflationary) value proposition of Bitcoin itself, the digital scarcity it creates. It is not hard to imagine what will happen in another 4 years and every 4 years after that. Eventually the new issuance will reach a number so close to 0 that it is safe to say that practically no new Bitcoin are issued.


Because miners are competing against each other the profit margins should theoretically move towards 0. While this might not be true for the entire industry (cost of electricity is an important distinction between geographically different miners), it is an indistinguishable fact that most miners need to sell Bitcoin in order to fund their mining operations for a prolonged period. The selling of Bitcoin is necessary because the costs of miners are due in USD and not BTC. Now that the halving has taken place this fundamental sell pressure is reduced from 12,5 BTC every block to 6,25 BTC every block. This effect might not be noticeable in the short term. This is because some miners are forced to liquidate, others have lent out their Bitcoin which means they will sell these later and several other factors can create a lag on sell pressure caused by miners. One negative remark that can be made, and should be made by us, is regarding the security of the network. With the block subsidy being reduced by 50%, so does the monetary incentive to secure it. However this is not yet shown in the hashrate, which is currently at 125.7 EH/s, for context this is only ~7,7% below the previous all time high which was 136.2 EH/s. What this means is that despite the halving taking place the miners of the Bitcoin network are willing to secure it even while being subsidized less in both USD and BTC terms. However this is a snapshot just after the halving event, some miners might start shutting down over the next few weeks or add additional hashpower depending on the price movements and cost of mining.

Overall because of the lag mentioned above we expect it to take a few months to see the effects of the halving back in the Bitcoin price. And not in a sudden hockey stick shaped price increase after yesterday’s halving. This is in line with previous halvings and their effect on price, in which it also took roughly 12 months for the price to showcase the result of the halvings. In 2012 this resulted in a price increase of ~9,336% from 11 USD to 1038 USD. However during the 2016 halving this effect was already less severe as there was more price lag. There was even a drop in price a month after the halving, after which the price started going upwards resulting in a ~400% increase in price in the 12 months following the halving. The price movements regarding the previous halvings are shown in the graph below.


A few remarks are in order to put the price data above in proper context. First, the sample size of only two previous halvings is small. In addition the bitcoin market and mining operations have professionalized greatly over the last years. This will result in different outcomes related to the halving that took place yesterday. It should also be taken into account that other factors such as macroeconomic developments and other demand side factors play a role in the price equilibrium for bitcoin. But it is without a doubt that the issuance, and therefore the increase of the supply side, reduced by 50% yesterday. Even more noteworthy and on a more fundamental level the halving taking place again, despite all turmoil in the world, and the network still up and running shows the resilience of the Bitcoin network. The reality is that digital scarcity is here and another halving only reinforces the belief in this for many people and institutions. In doing so it puts forward the best feature Bitcoin has to offer.