6 min readOne of the major catalysts for bitcoin’s latest rally is the upcoming halving, the term the crypto community uses to refer to the periodic drop in block rewards paid to miners. Halvings are unparalleled in the traditional financial markets, so investors who are new to crypto need to understand how the mechanism works. This blog post aims to dispel various myths about these events, not just how bitcoin’s price responds but also the impact on other aspects of the ecosystem.
Myth 1: Bitcoin Halving Always Leads to Price Increase
The main reason investors so keenly anticipate halvings is the potential effect on price. Bitcoin has rallied following previous events, although to different degrees depending on the timescale analysed. For instance, it hit a new all-time high of $61,000 within a year of the last halving in May 2020. As a result, many investors treat these events as a leading indicator.
However, as the saying goes, correlation doesn’t imply causation. While the halving is one of the factors driving bitcoin’s current rally, other forces are at play too, primarily applications submitted in mid-2023 by prominent financial institutions to launch spot exchange-traded funds, followed by their approval by the Securities and Exchange Commission in early 2024. The macroeconomic environment also favours risk assets like crypto as central banks around the world start to pause and consider reversing monetary policies implemented to tame inflation.
Myth 2: Bitcoin Mining Becomes Unprofitable After Halving
Miners play a crucial role in bitcoin’s proof of work consensus mechanism. They compete for the right to process the latest batch of transactions by completing complex mathematical puzzles, which require significant amounts of computing power. In return, miners receive block rewards in the form of bitcoin. So when these rewards drop by 50%, it’s reasonable to question the impact on the mining business model, given the costs required to run an operation.
Like any company, a miner’s profitability depends on income and costs. In terms of income, they earn another revenue stream from processing bitcoin transactions. As demonstrated below, these fees averaged between $1 and $2 for the majority of 2023, but they peak as demand rises, such as when Ordinals (non-fungible tokens) launched on the bitcoin protocol at the end of the year.
On the other side of the ledger, energy costs have a major impact on a miner’s bottom line. Cheaper energy in the US- where a sizeable proportion of activity takes place- should help to offset lower block rewards. Meanwhile, as shown in the chart below, mining rigs are becoming more efficient.
According to CoinShares’ 2024 Mining Report, Riot is the miner best positioned to navigate the upcoming halving, while Bitfarms, Iris, CleanSpark, TeraWulf and Cormint can remain profitable with bitcoin below $40,000. Others must cut selling, general, and administrative costs to avoid losses.
Myth 3: Halving Reduces Bitcoin's Security
Cutting block rewards could also theoretically weaken the Bitcoin protocol as miners also help to secure the network. One of their key responsibilities is preventing 51% attacks, which would allow a bad actor to reverse transactions (the ‘double spend’ problem) after gaining control of more than half of the network’s computational power, known as the hashrate.
But previous halvings haven’t disincentivized miners. Instead, they adopt various strategies to prepare for these events, such as upgrading their machines and switching to more affordable (and environmentally-friendly) energy sources like wind or solar power. Some are exploring ways to diversify their income streams by running data centres to meet the growing demand from artificial intelligence apps.
If a higher hashrate is a sign of a secure network, the chart below provides reassurance. The hashrate has grown steadily despite the halvings in 2012, 2016 and 2020. After a dip in mid-2021, which coincided with China banning mining, it has risen exponentially ahead of the next event in May.
Myth 4: Bitcoin Halving Makes Mining Centralized
One final myth involving miners that needs to be addressed is halvings concentrate their activities, which increases the vulnerability of the bitcoin network and the risk of transactions getting censored. After all, the costs involved mean economies of scale and access to energy sources can present bigger miners or mining pools (groups of miners) with a significant competitive advantage over smaller rivals.
While halvings may contribute to this effect, they aren’t the only factor. Clusters of mining activities have formed in different global regions where energy costs are relatively low, most notably certain states in the US, China (the ban sent many miners underground) and Kazakhstan.
The crypto ecosystem is taking steps to address the centralization of mining. Twitter (now known as X) founder Jack Dorsey was one of several investors to recently back a pool called OCEAN. OCEAN aims to decentralise mining by increasing transparency and allowing miners to receive block rewards from the bitcoin protocol, instead of a central authority controlling a pool.
‘OCEAN’s non-custodial payouts directly to miners from the block reward remove the risk of a pool withholding payment and the pool’s undue influence over miners,’ explained co-founder and president Mark Artymko.
Myth 5: Halving Event Is a One-Time Occurrence
The upcoming halving isn’t an isolated event. Block rewards are the only way new bitcoins come into circulation, and Satoshi Nakamoto, the pseudonymous founder, introduced this mechanism to control supply. Each halving takes place after 210,000 blocks of transactions are processed, which occurs at approximately four-year intervals.
Satoshi limited the maximum supply to 21 million bitcoin to preserve scarcity and prevent the kind of inflationary monetary policies pursued by central banks in response to the 2008 financial crisis. 93.65% of the coins are already in circulation (as of March 28, 2024), but the last halving is scheduled to occur in 2140 (at which point transaction fees become the main incentive for miners), so investors will have to navigate plenty more of these events in the years to come.
Conclusion
As the halving edges closer, various myths are circulating among investors about the potential impact on the price of bitcoin, the security of the network and mining activities. While each of these myths may contain an element of truth, it’s important to separate fact from fiction so investors can make informed decisions, both in the countdown to and aftermath of the next event and in the future.