Bitcoin is less than 100 blocks from another halving. As the network matures and cuts block rewards in its four-year cycle, miners are closer to a day when those subsidies are less than a bitcoin, and fees play a more determining role in covering operational costs.
The halving reduces the block reward miners receive for verifying transactions. Miners sell some of the bitcoin they receive from rewards to stay profitable and cover electrical costs. Currently, the majority of bitcoin miners receive comes from block rewards, not fees, so any reduction impacts their bottom line. Fees only account for 1% to 4% of miner compensation.
The upcoming reduction from 6.25 to 3.125 bitcoins per block will cut the supply output of BTC. Miners create about 144 blocks per day. Those blocks contain 14k bitcoin, or $1 billion in monthly rewards. This is about the same as the miners' current monthly revenue.
Past cycles prove that each halving impacts Bitcoin’s market price and ecosystem dynamics due to the enforced scarcity:
- 2012 Halving— 50 BTC to 25 BTC, with Bitcoin's price peaking around $1,100 one year later.
- 2016 Halving— 25 BTC to 12.5 BTC, followed by a price surge to about $20,000 by late 2017.
- 2020 Halving— 12.5 BTC to 6.25 BTC, leading to a price peak of over $64,000 in 2021 amidst increased institutional adoption and COVID-19.
In the months approaching the halving, data show that Bitcoin network transaction fees have risen to levels not seen since 2021.
Bitcoin’s average transaction fees in USD exhibit a notable uptrend.
The action from increased fees contributed to miner revenue being at an all-time high, which could help offset the decrease in revenue from the subsidy reduction.
While the percentage of revenue earned from transaction fees is minimal, it is still a crucial component of the long-term security of the Bitcoin network. Any time transaction fees support miner revenue is a good sign, albeit a difficult scenario as it makes holding and owning your keys more expensive. The tug-of-war between these market components highlights the delicacy of balancing Bitcoin’s network security and overall usability.
#Implications of the Upcoming Halving
In the past three months, Bitcoin’s price trajectory has shown a steady climb with distinct volatility spikes as we approach the halving event. A spike from $50k to an all-time high of over $70k suggests that the market may be factoring in the upcoming supply crunch.
Miners often reevaluate their strategies during halvings due to the impending block rewards reduction. Cash-fluid operations upgrade equipment to remain profitable, and mining pools may merge or stop operations if the numbers don’t add up. As prices soared, some miners opted to sell off stockpiles of bitcoin from past operations to capture profit. Alternatively, companies like Marathon Digital, Hut 8, and Riot Platforms choose to hold on to their bitcoin, anticipating price surges post-halving.
Unlike previous halving events, this upcoming cycle follows a period where prices reached an all-time high just before the halving. This sets a different context from previous cycles. This current market momentum may affect investor sentiment, as it introduces a new level of valuation, affecting how stakeholders plan and react psychologically in the Bitcoin market.
#Miners Revenue and The Halving
In correlation with Bitcoin’s spike in price action, mining returns are only slightly down from their all-time high of nearly $2 billion in monthly revenue. Miner revenue typically dips initially but increases significantly following a halving, aligning with a rise in Bitcoin prices.
The chart shows dips in miner revenue post-halving, which aligns with reduced Bitcoin block rewards, followed by a steep recovery as supply shock hits the market.
Bitcoin needs miners. Competition among miners is fierce and is likely to remain that way as the upward-trending hashrate of miners persists. The halving serves to exacerbate miners’ needs to balance profits and Bitcoin mining costs—one that aligns with their operational incentives and thus accounts for the greater need to attend to Bitcoin’s security budget.
A persistent increase in hashrate since July 2021 suggests a steady trend of intensifying competition among miners.
#Halving Relation to Bitcoin Security Budget
If it follows past cycles, the halving will induce shifts in Bitcoin’s security budget. Between August 2021 and April 2023, the miner’s earnings from transaction fees covered only a small portion of total block rewards, as we covered earlier, ranging from 1% to 4%. Even with network transactions at all-time highs such fees are insufficient to sustain miner operations.
In two more halvings, by 2032, the block reward will fall under 1 BTC. The impact on mining profitability must be attended to, particularly if miners cannot cover their costs and thus decide to exit the network. This recurring event highlights the necessity of sufficiently incentivizing miners while keeping transaction costs low to ensure the network remains accessible and widely used.
#How Mezo Is Built With Bitcoin In Mind
If we know that halving events intensifies the operational costs of miners in the face of diminishing block rewards, what is anyone doing about it? We built Mezo, Bitcoin’s Economic Layer, with these concerns in mind. Any network that relies on the value Bitcoin gives the ecosystem must also think about the long-term needs of the network and its participants.
Based on the principles of supply and demand, a reduction in Bitcoin can be advantageous for miners. As scarcity increases, bitcoin's potential value rises. It compensates for the lower quantity and supports mining profits. Mezo applies these principles in the network’s transaction mechanism—for each transaction on Mezo, a small increment of bitcoin is removed from circulation.
Mezo’s security model also encourages users to lock up their bitcoin for long-term intervals and provides greater rewards for lower time preference. The dual action of removal of bitcoin from circulation and the long-term commitment of bitcoin to Mezo is designed to work together—tipping the scales in favor of miners by leveraging the principles of supply and demand.
Halving events remain fixed milestones on the horizon. As Mezo scales out globally, it has the potential to ease this transition, enabling miners to remain resilient and support Bitcoin’s security as they become more reliant on transaction fees.
#Mezo Is Made For This Halving, And Each After
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