Imagine if half of the world’s gold sources suddenly dried up. Countless mines in which not a single ounce of gold would be found overnight. The supply of fresh gold that investors can buy: suddenly halved. What would such an event do to the price of gold?
This somewhat crude analogy is currently being used across the country in Bitcoin publications and investment podcasts to illustrate the possible consequences of the upcoming “halving” in the Bitcoin protocol. In itself, the gold comparison isn’t bad at all, because Bitcoin is “mined” in a similar way to the precious metal. Just not in mines with pickaxes, but in large computer farms and through computers that solve math puzzles. The gold analogy becomes a little crude mainly because the halving doesn’t happen as a surprise. It had actually been clear for years, or at least for months, that the Bitcoin supply would decrease again. Above all, those on whom the halving will have the greatest impact are likely to be well prepared: the mining companies. In other words, the operators of the huge computer parks who use their computing capacity to mine for new Bitcoins.
In the years since the last halving, these miners have been credited with exactly 6.25 Bitcoin per solved math puzzle – i.e. per successful mining operation. From Saturday morning around 4 a.m. Central European Time, this amount will be halved. From this point on, miners will only receive 3,125 Bitcoin for a successful calculation. This makes their business more difficult, brutally more difficult. Ultimately, companies have to buy expensive high-performance computers, which also consume an enormous amount of electricity.
The gold analogy: nice but crude
Currently, the price that a Bitcoin must fetch on the market for mining companies to reach zero after deducting their costs is around $23,000. After the halving, this value will rise to around $43,000, said the head of the large mining company Marathon, Fred Thiel, Bloomberg TV. The margin would therefore fall by $20,000 per Bitcoin mined. At the current price of around $63,000 it would still be quite high.
It would be more dangerous if the Bitcoin price fell significantly again after the halving. If the price fell below $43,000, many mining operations would become unprofitable. As a reminder, a Bitcoin price of $43,000 was not that long ago. This was last the case a few months ago, in December 2023. In particular, older and less efficient mining computers are likely to be switched off in such a case – until the price rises again or Bitcoin mining becomes easier again.
This is also provided for in the Bitcoin protocol: If the computing power available for mining in the entire network decreases, the network adjusts the difficulty so that 3,125 new Bitcoins will continue to be mined around every ten minutes. If mining becomes easier again, older machines that were previously switched off will become profitable again and come online again. This economic ballet is nothing new for Miner. The halving coming up on Saturday is the fourth such event.
What does the price do after the halving?
However, what is much more interesting for investors is the consideration of how the renewed programmed supply shock will affect the price. Economic orthodoxy has a clear opinion on this: If supply falls while demand remains the same, then the price rises. But as always there are a few imponderables. The demand for Bitcoin has already risen sharply after the US Securities and Exchange Commission approved new Bitcoin funds in January. These so-called Bitcoin spot ETFs allow investors in the United States to follow the price of the cryptocurrency one-to-one through regulated exchanges. Nobody knows how much of this increased demand can be attributed to anticipation of the halving. It is quite possible that demand will now decline for the time being. It is also possible that, in addition to the Bitcoins mined, the mining companies also sell off Bitcoin holdings to cover their costs, meaning that the Bitcoin supply does not decrease at all for the first few months.
Hartmut Giesen, who is responsible for cryptocurrencies at Hamburg-based Sutor Bank, also does not expect any major price movements. “The halving has already been priced into the current Bitcoin price as a driver of speculation,” writes Giesen in a statement from the bank. By taking profits, it is even more likely that the price will initially fall. However, in the medium to long term, Giesen expects prices to rise: “Higher demand from Bitcoin ETFs and generally easier accessibility will meet with a tighter supply after the halving. Demand already exceeds the daily mining of Bitcoin.”
If you take the history of previous halvings as a benchmark, there is also cause for optimism among Bitcoin holders. There have been three Bitcoin reward halvings so far. Around the halvings themselves, the price often stagnated for a while, followed by a strong rally a few months later.