SINGAPORE - The halving of popular cryptocurrency Bitcoin is widely expected in April and the quadrennial event has lifted the crypto market in recent weeks.

The halving, which slows the rate of new bitcoins issued into the network, is a highly anticipated event in the digital asset space, particularly as Bitcoin is the most dominant cryptocurrency by market capitalisation.

Crypto exchange Coinbase says the halving is expected between April 16 and April 20.

The Straits Times looks at what halving is and its potential impact on the crypto market.

What is Bitcoin halving?

Based on blockchain technology, Bitcoin has a protocol, or a set of digital rules, that is governed by different stakeholders, including developers, users and miners.

Miners solve complicated maths problems to verify transactions in the blockchain and this process adds new blocks to the Bitcoin network. The protocol dictates that each new block in the blockchain that is mined will introduce fresh bitcoins into circulation.

After the network mines 210,000 blocks, which takes about four years, the bitcoin reward given to miners for processing transactions is cut in half.

This is the halving mechanism that is written into the blockchain’s protocol.

The halving will continue every four years until about 2140, when the maximum supply of 21 million bitcoins is reached.

Why is there Bitcoin halving?

The halving is prescribed in the Bitcoin protocol to maintain scarcity and counter inflation. It is meant to control the digital currency’s supply and support its value.

How many halvings have there been?

The expected halving in April 2024 will be the fourth one.

In 2012, when the first halving occurred, the reward for miners was 25 bitcoins for every block mined, said Crypto.com.

This fell to 12.5 bitcoins per block in 2016 and 6.25 bitcoins per block in 2020, the exchange said.

After the April halving, the Bitcoin block reward will drop to 3.125 bitcoins per block. 

By the year 2030, about 98 per cent of the total bitcoin supply will be in circulation.

The tricky balance of the halving

As digital asset data research firm Amberdata said recently, assuming the price of Bitcoin remains constant, the reduction in block rewards directly increases operational costs for miners.

This is because the compensation miners receive for each block mined diminishes.

“Consequently, this shift compels miners to increasingly rely on transaction fees as a primary source of revenue for including transactions in a block. This dynamic underscores the delicate balance between maintaining network security and incentivising the participation of miners in the Bitcoin ecosystem,” Amberdata said.

Miners add new blocks of transactions to the blockchain. By doing so, they facilitate the processing of transactions. They also fortify the network’s security by validating and recording the transactions in a tamper-resistant manner.

Transaction fees on a blockchain are generally paid in the network’s native token. In the Bitcoin network’s case, it would be bitcoins.

Amberdata added that as the impact of Bitcoin halving on miners’ rewards is substantial, it becomes crucial to monitor the volume of transaction fees paid to miners. 

How will the halving affect Bitcoin prices?

The price of Bitcoin has risen since the start of 2024 on the back of the January approvals in the United States of spot Bitcoin exchange-traded-funds (ETFs).

In mid-March, the price hit US$73,100 (S$98,700). It now hovers around the US$70,000 mark.

Adding to investors’ optimism is the halving.

Mr Hassan Ahmed, Coinbase’s Singapore country director, noted that the introduction of US spot Bitcoin ETFs has changed how Bitcoin behaves in the market.

He said the ETFs allow institutions to trade Bitcoin more easily, with about US$4 billion to US$5 billion traded every day, and they hold about 5.8 per cent of all bitcoins in circulation.

“These ETFs bring in a steady flow of money into Bitcoin, making the market dynamics tighter,” Mr Ahmed said. “However, this doesn’t guarantee that Bitcoin’s price will skyrocket due to a shortage in supply compared to demand.”

He added: “While the market seems better prepared than before to handle changes like the halving, it’s still a complex situation. We believe the current price move is only the beginning of a longer bull run and that it will take further price appreciation in order to drive supply versus demand dynamics into balance.”