Bitcoin’s mining reward is about to be cut in half — What investors should know about the “Halvening”

The cryptocurrency ecosystem is about to undergo a tectonic shift. That’s because, on Monday, the reward for mining bitcoin is expected to shrink for the first time in four years. Miners currently receive 12.5 bitcoins (worth about $112,000) for successfully adding a block of transactions to the network. But based on current network activity, the “block reward” will automatically be cut in half to 6.25 bitcoins, likely sometime on May 11, 2020.

This is actually the third reduction to bitcoin’s block reward. The first happened in 2012—when the block reward dropped from its original 50 coins to 25 coins—and the second occured in 2016, when it was cut from 25 coins to 12.5 coins. (FYI, Robinhood Crypto offers commission-free bitcoin trading, along with other cryptocurrencies like ether, litecoin, and dogecoin.)

The update to the block reward takes place every 210,000 blocks, or approximately every four years. The process is expected to happen over and over until the year 2140, when all 21 million bitcoins have been created. As of May 2020, approximately 18.37 million bitcoins have been mined, leaving about 2.6 million to go. (Once bitcoin reaches the hard cap on its supply, miners may continue validating blocks to earn transaction fees.)

The “Halvening,” as crypto investors refer to this periodic change in the block reward, is a critical part of bitcoin’s design. It’s meant to control the cryptocurrency’s supply, ensuring that a small number of new units enter circulation. A new block is added to the bitcoin network roughly every 10 minutes, meaning that right now, around 1,800 new coins are produced each day. But after the latest change, only 900 or so new bitcoins will be generated each day.

Reducing the block reward is like pumping the brakes while riding an electric scooter...

When riding an electric scooter, it can be dangerous to slam on the brakes. You could lose control or even fall on the pavement. (Ouch!) So, rather than stomp on the brake, you might apply gentle pressure, gradually slowing before planting a foot on the ground. Likewise, there might be chaos if bitcoin’s block reward came to a dead stop (i.e., immediately dropped to zero). If that happened, miners wouldn’t have an incentive to validate transactions—aside from collecting negligible transaction fees—and the network would risk grinding to a halt. By incrementally reducing the block reward at predefined intervals, miners and investors know what to expect (even if they don’t know how it might affect the cryptocurrency’s price).

For cryptocurrency investors, the halvening could be a good thing. In theory, reducing bitcoin’s issuance rate helps the cryptocurrency maintain its value—bitcoins remain relatively scarce and many believe that could make the digital units more valuable over time. (Economists would call this a “deflationary” monetary policy.) It follows that many bitcoin investors don’t want to sell their cryptocurrency—they expect it might be worth more in the future. Of course, that’s no guarantee.

But as we approach block number 630,000 (the third halving), the circumstances are markedly different than four years ago. For one, bitcoin has gone through a major boom and bust cycle (peaking at about $20,000 in December 2017). Cryptocurrencies more broadly have also garnered mainstream attention and investment, meaning that the stakes are even higher than they were before. And of course, we must consider that the world is in the midst of the coronavirus (COVID-19) pandemic, leaving the situation somewhat dicey.

While it’s difficult to know how things will shake out after the halving, mining bitcoin might not be as profitable. In the short-term, if bitcoin’s price remains stable, there could be a reduction in the number of bitcoin miners—and as a result, there could be fewer bitcoins entering the market. While this could exert upward pressure on bitcoin’s price, there’s also a possibility that this information is “priced in.” Many miners and investors know that the halvening is going to happen, so perhaps the current price ($9,000) reflects that understanding.

And so, we will soon witness a historic third halving of the block reward for the Bitcoin network. While no one can predict the future, it will be interesting to see how miners respond, and whether the change will have an impact on pricing and volatility. For investors or prospective investors in cryptocurrencies, this will definitely be an event to keep an eye on.

Cryptocurrency trading is offered through an account with Robinhood Crypto. Robinhood Crypto is licensed to engage in virtual currency business activity by the New York Department of Financial Services and is not a member of FINRA or SIPC. Cryptocurrencies are not stocks and your cryptocurrency investments are not protected by either FDIC or SIPC.