With the approval of the spot Bitcoin ETF, the next most important narrative in the crypto world is undoubtedly the fourth Bitcoin halving, expected on April 22, 2024. At this time, the block reward will reduce from 6.25 BTC to 3.125 BTC. As one of the most important narratives in the crypto industry, the “Bitcoin halving” has always been a panacea for boosting market confidence. Will this halving cycle follow the same pattern as before? What unexpected impacts could the new variables in the Bitcoin ecosystem since 2023 have?

“Moore’s Law on PoW Mining”

The article “Bitcoin becomes the flag of technology” mentions that, for decades, the growth chart of “Transistor Count” on a single chip, under the dominance of Moore’s Law, has shown a terrifying growth trend that is visible to the naked eye.

Mapping this to the domain of Bitcoin mining chips and other mining hardware, in the decade that Bitcoin mining has become mainstream, driven by the incentives of PoW (Proof of Work) cryptocurrencies like Bitcoin and the pursuit of “the beauty of computing power”, mining hardware has evolved from CPUs to GPUs, then to FPGAs, and finally to ASICs. Chip processes have also progressed from over a hundred nanometers to several tens of nanometers, and now to the current 7 nanometers or even smaller, gradually approaching the ceiling. Beyond this point, it would involve the quantum realm. The capital within the circle has always liked to collectively bet big on “halving events”. This was the case from the bear to bull cycle from 2018 to 2020. Built on this positive momentum, the Bitcoin mining sector is determined by continuously increasing computing power, new hardware, and the upcoming reward halving, among other factors, which will determine the overall growth of the industry and Bitcoin. More so today: just yesterday, on February 3rd, according to BTC.com data, Bitcoin mining difficulty experienced an adjustment at block height 828,576, with mining difficulty increasing by 7.33% to 75.5 T, setting a new historical high. The current average network hash rate is 550.07 EH/s. Moreover, this 7.33% increase in mining difficulty is the largest since March 2023. We are now in the midst of a new halving cycle, with a two-year window until the next Bitcoin halving. This may be the first (or second) time that the majority of participants and investors in this cycle will witness and experience a Bitcoin halving “event” firsthand, with the ingenious design of the mechanism bound to leave a lasting impression on everyone.

The Historical Cycle of Halving

For the crypto industry, each halving event is indeed a grand occasion, especially the first two Bitcoin halving cycles, which saw astonishing surges in value by tens of times (in the short term, both halvings were followed by a downturn due to the exhaustion of good news, but subsequently, after adjustments, they entered a long-term bullish trend). However, starting with the third halving in 2020, due to a significant increase in the number of industry practitioners, market attention, and the improvement of supporting infrastructure, Bitcoin has transcended its niche status within geek circles and started to interact with more external factors. In summary: before the first halving, insiders were more concerned about Bitcoin’s potential as electronic cash; during the second halving cycle, the focus shifted to Bitcoin’s attribute as a payment tool, which sparked a series of debates (the subsequent BCH fork was almost a top event within the circle); and by the third halving cycle, Bitcoin had become an alternative asset, with attention turning to the layouts of traditional institutions and capital becoming the main theme. Compared to the first two halvings, the third Bitcoin halving was unprecedentedly popular. At the same time, the overall geopolitical and economic environment during the third Bitcoin halving also impacted its performance: influenced by macro factors, Bitcoin fell from $7,600 to $5,500 with fluctuations on March 12 - March 13, two months before the halving on May 11, 2020, and subsequently broke through support levels, reaching a low of $3,600, with the total market value evaporating by $55 billion and over 20 billion yuan in liquidations across the network, effectively experiencing a “halving” in price. However, after the May halving, the DeFi summer kicked off a new bull market cycle, with Bitcoin soaring to $60,000, nearly 20 times the pre-halving low. Overall, based on the historical pattern of halving cycles, from a traditional perspective, Bitcoin’s price is expected to return to half of the previous bull market’s peak around April 2024, possibly around $30,000. After the halving, it’s highly likely that a new bull market cycle will begin. Given the current scale, achieving a more than tenfold increase may be challenging, but surpassing the previous bull market’s high of $60,000 is still highly anticipated.

New Variables in the Bitcoin Ecosystem

Meanwhile, as Bitcoin has undergone three halvings, with block rewards reduced to 6.25 bitcoins and the mined quantity exceeding 19 million, many situations and matters have reached a point where they need to be reconsidered from a new perspective. Especially beyond this Bitcoin halving, the entire industry and Bitcoin itself have experienced some noteworthy new variables compared to previous halvings.

The Dynamic Game Behind the Halving Rules

We can briefly understand the basic knowledge of Bitcoin halving: Bitcoin’s mechanism design makes the role of miners exceptionally important as the cornerstone of the entire system’s transaction operations. Currently, miners’ income mainly comes from two parts - block rewards and transaction fees. The initial block reward was 50 bitcoins, halved every four years, and has been halved three times to 6.25, with the next halving in 2024. This process will continue until 2140 when there will be no more block rewards; however, transaction fees will always exist (as mentioned at the beginning with Monero). So, in the future, miners’ income will become very singular, with only transaction fees as rewards. In fact, Bitcoin miners’ transaction fee income has already surpassed block rewards, becoming the core of their income. This means the role of miners will always exist, but the income model will completely change: as block rewards gradually decrease to zero, the importance of transaction fees will increase, eventually becoming the sole source of income (this is also one reason miners advocate for larger blocks: the larger the block, the more transactions can be packed within the same time, resulting in more transaction fees). Although logically, the increase in transaction fees could compensate for the decrease in block rewards, high transaction fees are not conducive to the promotion and use of Bitcoin: miners maintain the network and provide value, relying on sufficient profit incentives; users create value by using the network and cannot afford high transaction fees; the Bitcoin ecosystem’s feedback adjustment has always been in this continuous contradiction, yet always able to reach a dynamic equilibrium through full gaming among all parties.

The Variable Brought by BRC20

Since 2023, the prosperity of the Bitcoin ecosystem, especially BRC20, has sparked a new wave of “BitcoinFi”, reaching new peaks in internal transactions within the Bitcoin ecosystem, thus boosting Bitcoin’s transaction fee income. Especially against this backdrop, protocol innovations like Ordinals, along with leading projects like ORDI and SATS, have profoundly impacted Bitcoin’s fee model - most directly, completely changing Bitcoin’s economic and incentive models. According to the latest data from Dune, as of February 4, the cumulative fees for minting Ordinals inscriptions exceeded 6,000 BTC, more than $250 million.

On December 17, 2023, the mining transaction fee revenue for BTC reached a new high of the past five years, amounting to 696 BTC (approximately 30 million USD), accounting for over 40% of the miners’ total income that day. Historically, miners’ transaction fee income typically made up only about 2% of their total earnings, yet the average over the past three months has exceeded 15%, setting a new record.

As the halving event approaches, the subsequent reduction in block rewards will gradually decline to zero, making transaction fees increasingly important until they become the sole source of income. The BRC20 in 2023 served as a precursor to this shift, and regardless of its success, the exploration of this path will garner more attention following the upcoming Bitcoin halving. Previously, Bitcoin’s advantages lay in its “orthodox recognition” and total market value. However, the NFT wave has significantly enriched the Bitcoin ecosystem with new assets. The demand for new assets is perpetual, and it also indirectly increases the number of developers and user base. Meanwhile, new innovations such as the RGB protocol, Slashtags (serving the Bitcoin Lightning Network ecosystem for identity accounts, contacts, communication, payments), the Impervious browser integrating numerous P2P services, the Taproot-based asset protocol Taro, and the Lightning token OmniBOLT are all worthy of anticipation. Overall, we are at the tail end of a new halving cycle, which may be the first (or second) time most practitioners and investors in this cycle have personally witnessed and experienced the Bitcoin halving event. What direction Bitcoin and this cycle will take after the halving remains an unknown.

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