The bitcoin halving: What is it? And why does it matter?

• Approximately every four years a “bitcoin halving” occurs, cutting the rate at which new bitcoin is issued in half. These scheduled events enable bitcoin to be slowly distributed into the market while maintaining its scarcity.
• Halving events are hard-coded into Bitcoin’s source code and are critical to bitcoin’s value proposition as a transparent cryptoasset with a finite supply.
• The next bitcoin halving is expected to occur around April 20, 2024. At this time, the amount of bitcoin created with each block of transactions will fall to 3.125 from 6.25 bitcoin.

Bitcoin miners are compensated for proposing blocks and extending the blockchain with newly issued bitcoin, known as block rewards. But to ensure bitcoin’s scarcity and maintain its codified 21 million supply cap, new issuance is designed to slowly decline through time and eventually fall to zero. The mechanism for achieving Bitcoin’s disinflationary monetary policy is known as a bitcoin halving. Approximately every four years a “halving” occurs and new bitcoin issuance is cut in half.

The next bitcoin halving is expected to occur around April 20, 2024. After this, the amount of bitcoin created with each new block will fall to 3.125 from 6.25, and daily issuance will fall to about 450 bitcoin from about 900. This process is scheduled to continue until the last bitcoin is mined around 2140.

To help understand the significance of the halving event, it’s important to first understand how bitcoin mining works.

Bitcoin mining is the process by which networks of specialized computers race to solve a cryptographic puzzle. The first miner to solve the puzzle earns the right to form the next block of transactions and is compensated with newly issued bitcoin.

The solution to the puzzle is not found strategically, but through a process of brute force guessing. Therefore, each miner’s probability of success depends on their proportional share of the network’s computing power, also referred to as “hashrate” (See Figure 1). This dynamic incentivizes bitcoin miners to invest in new hashrate. And since blocks are cryptographically linked, reversing a bitcoin transaction requires that a malicious party gain a majority share of the network’s hashrate, so the security of the Bitcoin network grows in tandem with the network’s hashrate. (Learn more about the evolution of bitcoin’s ecosystem.)

The bitcoin halving slows the pace of supply increases at the expense of bitcoin miners, who face a 50% reduction in block rewards  (See Figure 2). After the event, the Bitcoin network’s hashrate may suffer a temporary decline in response to weakening miner economics, as older, less energy-efficient mining hardware may become unprofitable and removed from operation.

Measuring the impact on miner profitability isn’t as simple as measuring the first-order revenue hit, however. Bitcoin’s mining algorithm dynamically adjusts its difficulty about every two weeks in response to changing hashrate conditions. If the network’s hashrate falls, the difficulty of the cryptographic puzzle will be reduced and the expected bitcoin production per unit of hashrate will increase, and vice versa.

Many crypto enthusiasts perceive the halving through a bullish lens as a reduced pace of bitcoin issuance could serve as a tailwind for price appreciation in a constant demand environment. Historically, bitcoin performance has been positive leading into and in the year of and immediately following halving events (Figure 3). Indeed, the price of bitcoin reached a record high of $73,150 on March 13, 2024 after rallying 160% in the prior six months.¹

That said, each subsequent halving has had a smaller impact on bitcoin’s inflation schedule. With about 94% of all bitcoin already mined, future issuance represents a small fraction of the circulating supply, potentially reducing the comparison to historical halving events. Moreover, bitcoin has been around since only 2009, so a sample size of just three prior halvings makes it difficult to place confidence in the accuracy of this narrative.

One thing we can say with confidence is that bitcoin is a volatile asset subject to large, short-term price swings. The halving presents a good opportunity to remind investors to take a measured approach that not only considers the potential upside that could come from investing in bitcoin, but also its volatility characteristics and risks. Beyond risk considerations, if you’re an investor in bitcoin or a bitcoin ETF, you don’t have to do anything to prepare for the halving. (Learn more about investing in bitcoin with the iShares Bitcoin Trust (IBIT).)

Bitcoin: Can refer to both the cryptoasset and the blockchain network.

• The protocol, Bitcoin, processes transactions and maintains the ledger via a distributed system of computers running Bitcoin software, known as nodes.
• The asset, bitcoin, is the native token on the Bitcoin network and the world’s leading and most widely adopted cryptoasset². It is mined, stored, and transferred on a peer-to-peer network via a public ledger, the blockchain.

Blockchain: A distributed digital database that is shared amongst the “nodes” of a network of computers that enables consensus. As a database, a blockchain stores information maintaining a secure and decentralized record of transactions. The core innovation of blockchain technology is focused on the fidelity and security of a record of data while minimizing trust amongst participants.

Block rewards: New bitcoin is created with each block and sent to compensate the miner that solved the block. The block reward started at 50 bitcoin when bitcoin was created in 2009. With the next halving, expected around April 20, 2024, the rewards will decline to 3.125 from 6.25.

Bitcoin halving: Bitcoin “halving” events occur when the block reward for mining bitcoin transactions is cut in half. These events were written into Bitcoin’s mining algorithm to counteract inflation and maintain scarcity. May 2020 was the most recent halving, when the block reward for a bitcoin “miner” went to 6.25 bitcoin. The next halving event is anticipated for April 2024 and will reduce the block reward to 3.125 bitcoin. Halvings occur every 210,000 blocks, or approximately every four years.

Hashrate: The combined computational power across all miners securing the Bitcoin network.

¹Source: Bloomberg as of April 1, 2024. Past performance is not indicative of future results.

²Source: CoinGecko, as of March 19, 2024. Bitcoin predominance based on its market capitalization of $1.3T, which accounts for greater than 50% of the total market capitalization of all cryptoassets, excluding stablecoins.