Galaxy Digital: Bitcoin Halving - A Milestone in Digital Scarcity

The transparency and predictability of Bitcoin’s issuance are key features that distinguish the asset from any other asset or currency in the world. No other asset has a calculable inflation schedule and a foreseeable supply event that reduces daily issuance by 50% overnight. Bitcoin’s anonymous creator, Satoshi Nakamoto, programmed the Bitcoin halving feature as a countermeasure to the continued debasement of fiat currencies.

“The fundamental problem with traditional currencies is all the trust required for them to function. Central banks must be trusted not to debase their currencies, but the history of fiat currencies is littered with violations of that trust.” - Satoshi Nakamoto, February 11, 2009

On April 20, 2024, Bitcoin will undergo its fourth halving at block number 840,000. During each halving event, the block reward (also known as the “block subsidy”), which represents the number of newly issued Bitcoins paid to miners for each mined block, is reduced by half. The block reward after Bitcoin’s fourth halving will drop from 6.25 BTC to 3.125 BTC (equivalent to a reduction from about 900 BTC to about 450 BTC per day). As a result, Bitcoin’s annualized issuance rate will drop from about 1.7% to about 0.85%. According to Coin Metrics, by the fourth halving, 93.7% of the total Bitcoin supply will enter circulation.

Half-time occurs every 210,000 blocks (roughly every 4 years), and after Bitcoin’s fourth halving, the network will experience 30 more halvings. Halvings are expected to occur until the last Bitcoin is finally mined, which is expected to occur sometime after 2140. Once all Bitcoins are mined and in circulation, miners will no longer receive block subsidies and will rely entirely on transaction fees and other forms of off-chain payments.

Bitcoin’s scheduled reduction in issuance approximately every 4 years is the backbone of its transparent, predictable monetary policy and makes Bitcoin a provably scarce asset. Most importantly, Bitcoin’s monetary policy is an immutable code executed by consensus among the network’s stakeholders (miners, nodes, developers). Bitcoin’s scarcity and the predictability of its monetary policy contrast with the significant devaluation of the world’s fiat currencies, which has earned Bitcoin the well-known nickname of “digital gold”.

Visualizing the Bitcoin Core Halving

Bitcoin Core is the open-source software created by Satoshi Nakamoto that lays the foundation for the Bitcoin protocol. Bitcoin Core is considered by developers to be the primary reference implementation of Bitcoin (although other software implementations are compatible with the network). As such, all of the functionality and logic that defines Bitcoin exists in Bitcoin Core.

The code in Bitcoin Core that forces the halving consists of 7 lines of code written in C++. Breaking down the code line by line is beyond the scope of this report, however, it is important to visualize the code responsible for determining the block reward at the current block height:

• Line 1240: Calculates how many halvings there have been.

• Lines 1245 – 1248: Determines the miner’s block reward.

Understanding Bitcoin Mining

Mining is a key component of the Bitcoin network. When a person wants to send Bitcoin to another wallet, the transaction is first broadcast to the network and checked for validity by nodes. Before being added to a block, the transaction exists in a queue state within the "mempool", a pool of transactions that are unconfirmed and waiting for miners to include them in a block. The block subsidy is both a means of incentivizing miners to contribute computing power to the network to process and settle transactions, and a method of allocating the supply of newly minted Bitcoins. As the price of Bitcoin rises, the incentive to mine blocks to receive these rewards also increases significantly.

Miners produce blocks by calculating the correct hash value of the next block. With this advantage, miners with the highest hash rate, or computing power from application-specific integrated circuit (ASIC) machines, will have the highest probability of finding the hash value of the next block. The first miner to calculate the correct hash value will receive the block subsidy and the transaction fees in the block. Usually, the time to calculate the correct hash value is about 10 minutes (Bitcoin's block time). The network guarantees miners that the block time is always around 10 minutes through difficulty adjustments. These adjustments are made every 2016 blocks (about every two weeks) as the network hash rate increases or decreases. The more hashing power there is, the harder it is to mine a block. Finally, by convention, the first transaction in a block is a special transaction that starts new coins owned by the creator of that block. This increases the incentive for nodes to support the network and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant amount of new coins is analogous to a gold miner expending resources to add gold to circulation. In our case, that's CPU time and electricity. ” - Satoshi Nakamoto, Bitcoin Whitepaper, October 31, 2008

The impact of halving on Bitcoin mining

Bitcoin miner rewards are composed of block subsidies and transaction fees. During the halving, Bitcoin’s block subsidy will be halved from 6.25 BTC to 3.125 BTC. Keeping Bitcoin’s price and network hashrate unchanged, this will cause Bitcoin miners’ revenue to be almost cut in half, as block subsidies currently account for the majority of total rewards.

The table below outlines the projected cost of mining one Bitcoin for various commonly used ASICs (listed from least efficient to most efficient) under different post-halving electricity cost scenarios. These calculations assume a network hashrate of 625 EH and transaction fees of 10% of the block reward.

In preparation for the halving, miners have been working to improve operational efficiency by reducing costs and upgrading equipment. Many miners have announced large ASIC purchase orders and strategic site acquisitions to position themselves well ahead of the halving. As highlighted in the table above, at $50/MWh electricity costs, the S21 is 50% cheaper to mine than the S19, illustrating the importance of improving fleet efficiency.

Ahead of the halving, miners have been increasing their cash reserves, maintaining large cash reserves as “dry powder” to take advantage of discounted infrastructure purchases in the event of a potential increase in Bitcoin prices. M&A activity is expected to surge post-halving as assets are transferred to more efficient operators, consolidating the industry landscape and driving further optimization.

Overall, the upcoming Bitcoin halving is a critical moment for miners. As the industry prepares for a significant reduction in block rewards, miners face an urgent need to adapt and innovate in order to remain profitable and sustainable in a changing environment.

The impact of halving on Bitcoin price

The impact of halving on Bitcoin price is an ongoing debate that occurs with every halving. While historically, market participants have viewed halving as a bullish event for Bitcoin price, opposing views have argued that halving has a negligible impact on price. Below is a breakdown of the market’s current bullish, bearish, and neutral views on the impact of halving on BTC price.

Bullish View:A 50% reduction in Bitcoin block rewards makes Bitcoin more scarce as an asset overall while reducing the absolute amount of miners selling. Miners have always been considered forced sellers of Bitcoin because these operations are capital intensive and Bitcoin sales are the primary source of revenue for miners. As a result, miners have always sold a portion of their block rewards for fiat currency to cover operational expenses such as energy, labor, debt, and new machines. Many believe that the reduction in supply growth corresponding to reduced selling pressure from the mining community led to an increase in the value of Bitcoin following the halvings in November 2012, July 2016, and May 2020, and that the same may be true after the fourth halving. Market participants who view halvings as bullish for price sentiment also use the widely circulated stock-to-flow model to quantify the impact of Bitcoin's supply reduction on price. Proponents of this view generally believe that investors are not properly factoring in halvings into current Bitcoin valuations.

Bearish View: As Bitcoin prices approach all-time highs for the first time in history, market participants who view halvings as bearish for Bitcoin prices believe that the market has adapted to the first three halvings and has already priced in the impact of this event. Prior to the most recent two halvings, BTC was down more than 42% from its previous all-time highs. In fact, at this stage in Bitcoin's supply schedule, the 2017 and 2020 bull runs had not yet begun. The impact of each halving on Bitcoin's supply dynamics is bound to decrease by half, and the impact will decline over time. For example, in absolute terms, a reduction from 900 BTC per day to 450 BTC per day is much smaller than a reduction from 7,200 BTC per day to 3,600 BTC per day (the first halving). Considering that Bitcoin's current daily issuance of 900 BTC is negligible compared to the daily circulation of the asset, the impact of an additional 450 BTC per day after the halving on BTC prices will be minimal. In addition, bears believe that the reduction in miner income may cause chaos in the mining industry and make the Bitcoin network less secure.

Neutral View:The efficient market hypothesis suggests that Bitcoin's past and future halvings are the opposite of "new information" and cannot be considered supply shocks. Bitcoin's transparent and predictable issuance schedule should always be reflected in the market. The bull market after the halving may be more related to changes in demand than changes in supply, and may even be more related to factors such as global market liquidity, central bank interest rates, and other macro conditions.

Historically, Bitcoin enters a bull run during the post-halving hype phase, which lasts from 0 to 600 days. After the first halving in 2012 (Cycle 1), the Bitcoin price reached the cycle top 367 days after the halving. During the second halving in 2016 (Cycle 2), price discovery after the halving was slower and reached the cycle top 525 days after the halving. The third halving in 2020 (Cycle 3) reached the cycle top 546 days after the halving.

If history repeats itself, we are currently at the end of the accumulation phase and will slowly enter the hype phase sometime in 2024.

For the first time in history, the price of Bitcoin has broken through the all-time high before the halving. During the first two halvings of Bitcoin in 2016 and 2020, the price of Bitcoin fell by 42.5% and 52.8% from its previous all-time highs, respectively. While the strong price action before the halving of Bitcoin can be seen as the market leading the hype phase we usually see after the halving, the driving force behind the price of Bitcoin in this cycle is new developments that did not exist in previous halving cycles, especially the launch of a spot-based Bitcoin ETF in the United States in January 2023.

Bitcoin’s fourth halving will occur at a time of major paradigm shift for the asset following the launch of spot Bitcoin ETFs. Since the launch of the ETF on January 10, 2024, BTC spot ETF net inflows have accumulated more than $12.5 billion. Bitcoin has re-emerged at the forefront of macro investor discussions and is now viewed as a key macro hedge asset alongside gold and Treasuries. The advent of a Bitcoin ETF in the U.S. represents a seismic shift that will upend traditional ideas about Bitcoin price cycles, holder behavior assessments, and rotation dynamics within the cryptocurrency.

Block Activity Halving

Block number 840,000, also known as the halving block, will be a block with high demand for transaction inclusion due to its historical significance and rarity. Halving only occurs every 210,000 blocks, and there will only be 34 halving blocks in Bitcoin's existence, which will create intense competition among users and miners to include transactions or mine blocks within that block.

The core factors driving the transaction fee surge at the halving include the launch of a new fungible token standard called Runes, and the rare sit hunt. Runes are a new fungible token standard for Bitcoin that is more efficient than the BRC-20 token standard. Runes will be launched on the halving block, and a large collection of Rune tokens are expected to pay high transaction fee rates to ensure their inclusion in that block. To learn more about Runes, we will cover the new fungible token standard in detail in the Galaxy Research newsletter. For reference, sats are the smallest unit of Bitcoin — one Bitcoin is divisible by 100 million sats. Rare sats are a new collectible asset on Bitcoin, created when Ordinals emerge in December 2023. Rare sats collecting entails purchasing sats that were mined in blocks of historical significance, such as the halving block or the block mined by Satoshi Nakamoto (block 9). Every sat in block 840,000 will have significant historical value, and as such, rare sat hunters will charge high fees in their transactions to ensure block inclusion.

Another potential factor driving up transaction fees during the halving is if mining pools attempt to reorganize (re-organize) Bitcoin’s historical blockchain state. A reorganization occurs when an alternative version of the blockchain gains consensus among nodes, effectively rewriting a portion of the blockchain’s transaction history. While the chances of a successful reorganization are slim, mining pools may attempt to reorganize the chain to successfully capture blocks with high fees. It is worth noting that mining pools that attempt to reorganize the chain but are unsuccessful will still drive up transaction fees because the hashrate used to reorganize the chain is being diverted away from the longest chain tip. This will slow down block times and cause fees to naturally increase as mempool pressure has more time to accumulate.

Why Halvings Matter

The halving is a manifestation of Bitcoin's transparent, predictable, deflationary monetary policy. Halving events reinforce Bitcoin's fundamental value proposition, including its open peer-to-peer network, competitive mining industry, decentralized node network, and active open source development community. The halving itself is the mechanism that distinguishes Bitcoin from other assets in terms of scarcity.

Bitcoin's unchanging monetary policy coupled with a hard cap of 21 million is a revolutionary concept for a macro asset. The transparency of Bitcoin's daily issuance schedule allows anyone in the world with a computer to verify for themselves that Bitcoin issuance is proceeding as planned, without relying on or trusting intermediaries. In addition, every node in the Bitcoin network can confirm that the 21 million hard cap supply remains intact.

The predictability and transparency of Bitcoin’s fixed supply make this emerging asset a viable alternative store of value to fiat currencies. Unlike Bitcoin’s fixed supply, fiat currencies are subject to the discretionary actions of central banks, which have the power to adjust the money supply to manage economic stability or stimulate growth. This discretion results in an unrestricted total supply of all fiat currencies and an unpredictable issuance schedule. The impact of this unpredictability is clear when evaluating central bank behavior. In response to the global economic turmoil caused by the COVID-19 pandemic, the Federal Reserve printed $5 trillion out of thin air, more than doubling the central bank’s balance sheet. This money printing, along with fiscal spending by the U.S. government, trickled down to the U.S. economy, helping to blunt the negative effects of lockdowns and COVID-19 measures and stimulate the economy, but ultimately led to the worst inflation in decades. Even gold, hailed as the oldest scarce monetary asset, lacks a clear total supply, and its production, while influenced by market dynamics rather than central bank policy decisions, remains unpredictable.

Bitcoin’s resilience throughout numerous bear markets highlights the rekindling of its value in the broader market as a decentralized macro asset with transparency, predictability, and scarcity. Bitcoin’s monetary policy is fixed, and each halving reaffirms its longevity. Halvings will continue to occur, and stakeholders will never be bailed out by the system. The halving, expected to occur on April 20, 2024, will reinforce these facts and will remind the market of Bitcoin’s unique properties.

“If you don’t believe me or don’t understand, I don’t have time to try to convince you, sorry.” - Satoshi Nakamoto, July 29, 2010