By WYATTE GRANTHAM-PHILIPS (AP Business Writer)
NEW YORK (AP) — In the next few days or hours, the individuals who create bitcoins through solving complex math problems will see a 50% decrease in their reward, effectively cutting the new production of the world’s largest cryptocurrency in half.
This could have various effects, from the price of the asset to the bitcoin miners themselves. And, as with everything in the volatile cryptoverse, it's hard to predict the future.
Here’s what you should know.
WHAT IS BITCOIN HALVING AND WHY DOES IT MATTER?
Bitcoin “halving,” an event that happens about every four years, affects the production of bitcoin. Miners use farms of specialized computers to solve complex math puzzles; and when they solve one, they receive a fixed number of bitcoins as a reward.
Halving does just what it sounds like — it reduces that fixed income by half. And when the mining reward decreases, so does the number of new bitcoins entering the market. This means the supply of coins available to meet demand grows more slowly.
Limited supply is one of bitcoin’s key features. Only 21 million bitcoins will ever exist, and more than 19.5 million of them have already been mined, leaving fewer than 1.5 million left to be mined.
As long as demand remains the same or increases faster than supply, bitcoin prices should go up as halving reduces output. Because of this, some argue that bitcoin can offset inflation — however, experts emphasize that future gains are never guaranteed.
HOW OFTEN DOES HALVING OCCUR?
In accordance with bitcoin’s code, halving occurs after the creation of every 210,000 “blocks” — where transactions are recorded — during the mining process.
No specific calendar dates are set, but this roughly happens every four years. The latest estimates suggest the next halving will occur sometime late Friday or early Saturday.
WILL HALVING IMPACT BITCOIN’S PRICE?
We can only wait and see. After each of the three previous halvings, the price of bitcoin was mixed in the first few months and ended up significantly higher one year later. But as investors know, past performance is not a guarantee of future results.
“I don’t know how significant we can say halving is just yet,” said Adam Morgan McCarthy, a research analyst at Kaiko. “The sample size of three (previous halvings) isn’t big enough to say ‘It’s going to go up 500% again,’ or something.”
At the time of the last halving in May 2020, for example, bitcoin’s price was around $8,602, according to CoinMarketCap — and increased almost seven times to nearly $56,705 by May 2021. Bitcoin prices almost quadrupled a year after July 2016’s halving and rose almost 80 times one year after bitcoin’s first halving in November 2012. Experts like McCarthy emphasize that other positive market conditions contributed to those returns.
This next halving also comes after a year of sharp increases for bitcoin. As of Thursday afternoon, bitcoin was just over $63,500 per CoinMarketCap. This is lower than the all-time-high of about $73,750 last month, but still double the asset’s price from a year ago.
Bitcoin's recent surge in price is often attributed to the early success of a new method of investing in the digital asset called spot bitcoin ETFs, which were approved by U.S. regulators in January. spot bitcoin ETFsBitwise's research report revealed that spot ETFs saw $12.1 billion in inflows during the first quarter.
Bitwise's Ryan Rasmussen mentioned that sustained or increasing ETF demand, along with the potential impact of the upcoming halving, could further boost bitcoin's price. growing ETF demandRasmussen anticipates a strong performance from Bitcoin in the next year, with some predictions suggesting gains as high as $400,000, while others estimate a range of $100,000-$175,000.
Other experts caution that the potential gains may have already been realized.
JPMorgan analysts believe that post-halving price increases may not occur as the event is already factored into the market and it is currently in overbought conditions based on their analysis of bitcoin futures.
Miners will face the challenge of compensating for the reduced rewards while managing operating costs.
Halving could significantly impact a miner's ability to cover expenses, even with a slight increase in bitcoin price, according to Andrew W. Balthazor, a Miami-based attorney specializing in digital assets at Holland & Knight.
Some better-prepared miners may have already taken steps to improve energy efficiency or secure additional funding, while less-efficient firms may encounter difficulties.
It is likely that consolidation will occur in the bitcoin mining industry, a trend that has become more common following a major crypto crash in 2022.
Bitwise's recent report found that total miner revenue dropped one month after each of the three previous halvings, but rebounded significantly after a year due to increases in the price of bitcoin and expansion by larger miners.
It remains to be seen how mining companies will fare after the upcoming halving, but Rasmussen believes that major players will continue expanding and leveraging technological advancements to enhance efficiency.
Determining the direct environmental impact of bitcoin halving is still somewhat uncertain, but it is well known that crypto mining consumes a substantial amount of energy and has drawn criticism for relying on pollutive energy sources.
According to recent research, the carbon footprint of bitcoin mining from 2020-2021 equated to the emissions of burning 84 billion pounds of coal or running 190 natural gas-fired power plants across 76 nations. Coal, natural gas, and hydropower satisfied the majority of bitcoin's electricity requirements.
Environmental impacts of bitcoin mining
boil mostly down to the energy source used. Experts in the industry have said that efforts to use more clean energy have increased in recent years, as regulators worldwide are calling for climate protections. However, the pressure to produce could lead miners to use cheaper, less environmentally friendly energy sources. JPMorgan also warned that some bitcoin mining firms may seek to expand into regions with low energy costs to utilize inefficient mining rigs when the halving occurs. In the next few days or even hours, the individuals who extract bitcoins using complex math will experience a 50% reduction in their rewards, effectively cutting the production of the world’s largest cryptocurrency in half. This could have many consequences, from the asset's price to the daily operations of bitcoin miners. Furthermore, given bitcoin's notorious volatility and relatively young age as an asset, it is difficult to predict the future. This upcoming halving will only be the fourth since the digital currency launched in 2009.
Recent research published by the United Nations University and Earth’s Future journal found that the carbon footprint of 2020-2021 bitcoin mining across 76 nations was equivalent to emissions of burning 84 billion pounds of coal or running 190 natural gas-fired power plants. Coal satisfied the bulk of bitcoin’s electricity demands (45%), followed by natural gas (21%) and hydropower (16%).
Environmental impacts of bitcoin mining boil largely down to the energy source used. Industry analysts have maintained that pushes towards the use of more clean energy have increased in recent years, coinciding with rising calls for climate protections from regulators around the world.
Still, production pressures could result in miners turning to cheaper, less climate-friendly energy sources. And when looking towards the looming halving, JPMorgan cautioned that some bitcoin mining firms may also “look to diversify into low energy cost regions” to deploy inefficient mining rigs.
