You may have heard about the upcoming “halving” in April 2024. Not only is the halving a massively important occurrence in Bitcoin every 4 years, but this one in particular has special significance. By learning about the halving, you will also learn important concepts about how Bitcoin works, and how its scarcity, one of its most prized attributes, is enforced. But there is another, much more tantalizing reason to learn about the having, beyond just improving your knowledge of Bitcoin (as tantalizing as that is). But before we get there, we have to learn about what the halving is. Let’s get into it!
Every 210,000 blocks mined, the block subsidy gets cut in half…ok let’s back up.
Bitcoin transactions are added to the blockchain in blocks - think batches of transactions. Blocks are added to the blockchain by miners whose nodes compete to algorithmically solve the, let’s call it “mining puzzle” for now to avoid getting too technical. The miner who solves the puzzle first will receive the block reward.
The block reward is comprised of two parts - transaction fees, and the block subsidy.
The miner will have chosen which transactions go into the block based on their transaction fees. When a user submits a transaction, they specify a transaction fee that the miner will receive for the transaction. Typically, the user’s wallet software will estimate for the user how high of a fee is needed to get a transaction included in the next block or the next few blocks, based on fees of recently accepted transactions.
The transaction fees of all the transactions in the block are paid to the miner who mines the block.
The other part of the block reward is the block subsidy. A successfully mined block offers the miner the ability to include a transaction that gives the miner some bitcoin. How much can they give themselves? That’s where the halving schedule comes in. Today, in early 2024, the block subsidy amount is 6.25 bitcoin. If a miner would try to give themselves more than that, the block would be rejected by network nodes, and the miner’s block would not be mined.
That means that with the next halving, which is coming soon, the block subsidy will be cut to 3.125 bitcoin for every mined block.
The halving is how Bitcoin’s fixed supply is enforced. New bitcoin will be added to the supply with every block until the block subsidy declines all the way to 0 in 2140. At that point, the total supply of Bitcoin will be 21 million.
We know how many blocks till each halving, but how do we have timing estimates like this? To explain how we can estimate the timing of new blocks, we have another important mechanism in Bitcoin to learn about, first. Many call it the breakthrough innovation of Bitcoin, as Bitcoin is mostly a novel application and combination of existing ideas.
Remember I mentioned the “mining puzzle” above. Every 210,000 blocks, the block subsidy halves. And every 2,016 blocks, the difficulty of the mining puzzle adjusts.
The goal in Bitcoin’s implementation is that a block would be mined every 10 minutes. You would expect that if there are more miners racing to mine a block, then blocks would be mined more frequently than every 10 minutes, and if there are fewer, less frequently.
So, if there are tons of miners competing for blocks, and on average they are producing blocks, for example every 9 minutes, at the next difficulty adjustment, the difficulty will adjust upward, making the puzzle more difficult so that on average it takes miners’ machines a bit longer to algorithmically solve.
And if miners have been dropping off, like when the Chinese government banned Bitcoin mining, and blocks are being mined at a rate slower than every 10 minutes, the difficulty will adjust downward.
Just like the enforcement of the halving schedule, nodes on the network enforce that the miners have adjusted the difficulty of the mining problem solved in their block - if a miner solves a problem not difficult enough, the block will be rejected.
Some economics: As demand for a good in the market place increases, other participants in the market tend to respond by supplying more of that good. For example, if all of a sudden, the popularity of apples went through the roof, farmers would respond by allocating more of their resources to producing apples. Same for gold - if demand for gold dramatically exceeds the above-ground supply of gold, gold mining businesses will expend more time and energy to get more gold out of the ground.
All of that to illustrate that increased demand leads to higher prices for XYZ, which signals to producers that they should produce more XYZ, and so the supply of XYZ increases.
If demand for Bitcoin increases, supply cannot increase to accommodate. That is, more miners can’t just produce more bitcoin to satisfy the demand. Only a certain amount of Bitcoin is added to the network per block (via the block subsidy), and the rate of block production will not increase, thanks to the difficulty adjustment maintaining a schedule of roughly one block every 10 minutes.
Additionally, over time that amount of new Bitcoin added to the network with every block is declining with each halving, to the point of eventually none being added at all. No other commodity on earth possesses this kind of scarcity.
A good way to understand and classify moneys is by their hardness. Monetary hardness can be expressed in the stock-to-flow ratio, ie, the ratio of the total above-ground (or processed and ready-to-be-used) supply to the number of units added over, say, a year. The “flow” of new bitcoin is the bitcoin added with each block in the block subsidy, and after the upcoming halving, the flow will be cut in half, and Bitcoin will overtake gold to become the hardest money of all time.
But Bitcoin’s hardness is better than other hardness. Hardness is a measure of scarcity, but it does not capture the fact that with more demand, most commodities could see an increase in flows. Post-halving, Bitcoins flow is fixed at 3.125 roughly every 10 minutes for the next 4 years.
At the time of publication, there are just over 17,000 blocks to go until the having. The estimated date of the halving is April 25. This is subject to change, if, for long enough stretches between difficulty adjustments, blocks are mined more or less frequently than every 10 minutes. You can track the estimate over time here
In Bitcoin today, there are 6.25 new bitcoin every 10 minutes added to the supply. If we assume that that is enough to meet demand from people trying to acquire bitcoin, then when the amount of new bitcoin drops to 3.125, there will be excess demand for those 3.125 bitcoin, and the natural market reaction is for that demand to accept a higher price.
All that to say, the halving is an extremely positive price catalyst. I’m not going to tell you to sell your chairs to buy bitcoin…but you can find that advice on the internet. Do what you will with that information.
People will say it is like a stock split, where the price of a stock is cut in half and the number of shares doubles (total value is maintained, but the stock becomes more affordable). The halving is nothing like a stock split.
It is more like if every home builder in the country made an agreement that they would build half as many houses as they’ve built in the recent past. If demand for houses stays the same, but there are half as many new houses becoming available to satisfy that demand, where is that demand going to get a house? Economics suggests they will find it at a higher price, the natural reaction to demand exceeding supply.
We learned about mining, the block subsidy, the difficulty adjustment, and the significance of the 2024 halving in Bitcoin’s future. Now we wait with anticipation til the second half of April for the halving that makes Bitcoin the hardest money of all time. More excitingly perhaps, we wait to see what the market does with half as much new Bitcoin coming online to satisfy buyers. In a world where easy money flows to the political elites, the halving is a celebration of Bitcoin as “hard money you can’t f*ck with” getting even harder.