The crypto world is abuzz with talk of the upcoming Bitcoin halving. Anyone new to the world of crypto may well be wondering what a halving is and why on earth is it such a big deal. This post will explain the halving, its significance, and its potential impact on the world of crypto.
The importance of a fixed supply
One of bitcoin’s most important properties, in addition to being permissionless, decentralized, and censorship-resistant, is the fixed supply. This quality makes bitcoin similar to traditional commodities such as gold and silver.
Just as the supply of gold diminishes over time as miners unearth the metal from the earth’s crust, the supply of new bitcoin reduces through an inbuilt mechanism which halves the creation of new bitcoin roughly every four years.
This event, known as the Bitcoin halving, is a pre-programmed event that happens roughly every four years and occurs when the number of Bitcoins mined reaches a certain threshold. When this happens, the number of new Bitcoins awarded to miners for verifying transactions is cut in half. This means that the rate at which new bitcoins are created is reduced, making them more scarce and valuable — which is significant, given that the total number of Bitcoins that will ever exist is capped at 21 million.
You might be thinking, why should I care about the halving? Well, historically, the halving has had a significant impact on the price of Bitcoin and generally led to a rise in its price, making it an exciting time for investors and traders alike.
The immediate impact: Bitcoin could rocket
To understand the enormous impact that the halving has always had on the price of BTC, we need to look at the history of how halvings have happened and what the effects have been.
As shown in the table below, the previous halvings, (2012, 2016, 2020) all showed phenomenal growth in the twelve months that led up to them (which is where we currently are in the 2024 halving cycle), as well as during the halving year itself; yet the year following the halving has repeatedly been the best performing period, showing staggering gains.
To illustrate: in the first year after the 2012 halving, we saw a huge price surge, the momentum of which carried into the following year. From the months leading up to the halving, and in the months directly following it, Bitcoin’s price went up to $32 from $12.42, and just kept going, finally passing $1,000 for the first time on the 30th of November 2013, when it hit $1,127.45.
This is the point widely considered to be when Bitcoin began to gain notoriety.
The next halvings followed similar patterns, with similar timings, affirming the four-year cyclical nature of the events.
Immediately prior to the 2016 halving, Bitcoin stood at around $646. Following the 2016 halving, it once again passed the $1,100 mark in January 2017, and kept on going until hitting $20,000 in December. Almost a year after the 2020 halving, the price of Bitcoin was hovering around $46,000 (in August) and by November it reached approximately $68,500, its all-time high.
Of course, what goes up must also come down. The two years following the halving event (2014, 2018, 2022) are traditionally periods of decline for Bitcoin.
For instance, following the incredible heights that Bitcoin attained in December 2017, it took more than two years before Bitcoin saw the other side of $20,000. However, in this specific instance, while the pattern was the same, the context was somewhat different. Crypto was now becoming more present in the public consciousness. Stories about Bitcoin and other cryptoassets began appearing in publications not limited to the niche markets it had previously been in, but those from actual mainstream news outlets – indicating a new interest and awareness.
Increased scarcity, increased value?
Those most impacted by the halving are the bitcoin miners, who are the professional companies running the specialized hardware used to mine blocks and reap the rewards on an industrial scale.
Mining is a tough business making marginal profit, and miners typically need to sell most of the bitcoin they mine to cover the high energy costs of running their operations. As such, they can take a big hit when the supply of new bitcoin is cut in half.
Understanding the mining process
On the Bitcoin blockchain, a block is mined every 10 minutes on average, and currently the miner of each successful block is rewarded with 6.25 BTC. Around 144 blocks are mined every day, generating roughly 900 new bitcoin daily. This bitcoin is mostly sold by the miners to cover expenses, and thus exerts a downward pressure on the price.
Predicted market response to reduced Bitcoin supply
At the next halving, currently expected in late April of this year, the rewards for mining a block on the bitcoin blockchain will be cut in half — meaning that only around 450 bitcoin per day will be created.
Assuming that demand for bitcoin remains constant, this event could change the balance of supply and demand by reducing the downward selling pressure created by miners.
As a result, prices are likely to rise, and history would indicate that the increase could be substantial.
Is the Halving priced in?
As mentioned above, the scarcity of bitcoin, and the constant demand, are often used to justify the rising prices that have occurred after each and every previous halving event.
Looking at price performance alone, the current cycle (see the black line in the chart below) seems to be riding a similar wave to previous market cycles. History could be indicating some potentially interesting price moves.
Bitcoin and the Efficient Market Hypothesis
But not every investor agrees, particularly those who believe in the “efficient market hypothesis” which states that the price of an asset reflects all existing available information.
These investors argue that as the halving is a public and predictable event, then the impact of all future halvings must already be reflected in the current price of bitcoin — and therefore the events would not have any meaningful impact on the price.
Unpredictable factors impacting Bitcoin price
However, even though the halving itself may be perfectly predictable, there are other factors at play that are more difficult to foresee.
These include the increased press coverage of crypto assets and Bitcoin that we often see around halving events, along with renewed interest in the potential of blockchain technology, and growing utility with more emerging real-world use cases for the asset — all of which can impact the price of Bitcoin.
Not only that, but Bitcoin is also influenced by the ever changing macroeconomic environment, which can influence miners to make different strategic decisions about buying and selling.
How does the halving impact other crypto assets?
The halvings set a pattern across the crypto realm that influences pricing and supply dynamics, thereby affecting other crypto assets. If you imagine the crypto world as a party where everyone’s dancing to the Bitcoin beat, the Bitcoin halving is like the DJ turning down the volume on the speakers every four years.
As mentioned earlier, the scarcity of new Bitcoin means less supply, which can impact its price. Other cryptos often take cues from Bitcoin’s moves, so when Bitcoin’s price goes up, it can lead to a broader market effect across the crypto space.
Not all cryptos follow the exact same four-year rhythm set by Bitcoin. While many altcoins are often correlated with Bitcoin, (i.e. if the price of Bitcoin goes up, so does the price of other crypto assets), this is not always the case. To revisit the party analogy given above, while Bitcoin’s halving might make its price twerk, it’s like a remix for other cryptos — they’ll feel the vibes, but they have their own dance floors, so they may experience different price movements depending on their own supply and demand dynamics.
Fun fact: Halvings are not limited to Bitcoin. Other altcoins also go through halving events — Litecoin, for example, had a halving in mid-2023.
Upcoming Halving: What to expect
All of these factors can play a role in determining how the market reacts to the halving. Yet the rule of supply and demand may be our best guideline: Regardless of what else is going on, this simple reduction of supply tends to favor higher prices.
The next Bitcoin halving is predicted to take place in April 2024, approximately four years after the previous halving in 2020. This means that we still have some time to prepare and monitor the market before the next halving event.
The Bitcoin halving is a highly significant event in the world of crypto, with the potential to significantly impact the value of Bitcoin and other altcoins. Anyone interested in investing in crypto should keep the halving on their radar.
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