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 supply reduction is known as “the halving“, and represents not only a fundamental change to the way Bitcoin operates — but a symbolic celebration of the cryptoasset’s ever-increasing scarcity.
And lest we forget – each halving has historically preceded a big bull run.
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 2024, 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.
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 cryptoassets 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.
Upcoming Halving: What to expect
All of these factors can play a role in determining how the market reacts to the halving. Yet one thing is certain: regardless of what else is going on, this simple reduction of supply fundamentally shifts the market in favor of higher prices.