Looking back, 2024 could prove to be one of the best years for cryptocurrencies. We won’t know until the end of the year, but one thing is for sure – Bitcoin (BTC USD) is on the rise.
The world’s largest cryptocurrency has surged more than 65% at the start of the year and is now trading above $73,000. This move was fueled by continued capital inflows into this digital asset via spot Bitcoin ETFs. After being approved by the Securities and Exchange Commission in January, institutional investors are flocking to these funds as investors scramble to gain access to cryptocurrencies.
This increased demand comes at a time when many investors expect Bitcoin to become even more scarce. The upcoming cryptocurrency halving, where mining rewards for Bitcoin miners will be halved. Therefore, we could be in for an upward price spiral, or at least that is what the market is expecting.
Let’s delve deeper into what this Bitcoin halving – or halving – is and why it is important for investors.
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Meaning of Bitcoin Halving
To put it simply, Bitcoin halvings occur approximately every four years. These halving events result in a 50% drop in newly issued Bitcoin. Since around 19.5 million Bitcoin have already been minted and a cap of 21 million was set when the token was first created, the cost of mining new Bitcoin will increase dramatically. This is a feature of Bitcoin’s fundamentals and not a flaw that has caused much of this token’s increase in value in the past.
Since there will only ever be 21 million Bitcoins in circulation in the market, the fact that fewer new Bitcoins are being created is a big deal. Scarcity is important, especially with stores of value like Bitcoin. So the recent price increase we’re seeing makes perfect sense.
Impact of Bitcoin Halving
With Bitcoin’s inflation rate dropping by 50% essentially overnight, this is an asset class that investors can rely on to reduce inflation over time. Compared to other cash-like instruments (or even cash itself), Bitcoin’s value should theoretically hold up better during times of inflation. This is another important aspect of this halving that is less discussed but is just as important in my opinion.
However, this mechanism does not protect Bitcoin users from inflationary effects when converting them into fiat currency for transactions. Inflation will continue whether consumers like it or not. But for those looking to park capital for a period of time, Bitcoin certainly seems like a compelling option with the halving looming.
Fueled by potential profits, investors are now flocking to the cryptocurrency market. This also leads to unexpected demand for Bitcoin. However, investing in Bitcoin could become more speculative as participants look to capitalize on the potential increase in value from halving events. So a certain degree of caution is required here.
Miners, whether individuals or companies, have traditionally found Bitcoin mining lucrative due to the rewards the parties receive. However, halving events reduce these rewards, potentially impacting profitability. The reduction also brings greater challenges for large mining operations. In this case, major investments are required, including in maintenance, equipment and modernization.
3 things you should know about the April event
Now that we know the meaning and relevance of the most anticipated Bitcoin halving, investors must know that the event alone is not just the solution and basis for determining the price of Bitcoin.
While there can be many market factors that cause and occur after the halving event, macroeconomic conditions also influence the price of Bitcoin. As the event slowly approaches, investors should expect greater volatility, a sharp increase in the price of Bitcoin and an impact on mining in general.
Volatility is likely to increase
Historical data suggests that Bitcoin has experienced significant price fluctuations over the halving years, with past trends pointing to bullish moves. However, it is important to recognize the potential for conflicting outcomes based on historical precedent.
As the newly launched ETF pushes Bitcoin prices higher again, attention turns to the upcoming halving in mid-April. The Bitcoin halving cycle, which occurs approximately every four years or every 210,000 blocks, reduces blockchain rewards for miners and aims to maintain Bitcoin’s scarcity. With each halving, the rate of new Bitcoin launches decreases, ultimately capping the total supply at 21 million Bitcoins.
The event attracts new investors and increases trading activity, but its impact on price increases may fade. By examining returns from July 2010 to February 2024, we assessed how halving periods affect Bitcoin’s price distribution.
Analyzing the distribution of returns and volatility over time shows the maturation of the Bitcoin market from a niche interest to a mainstream asset. With each halving event, returns and volatility decreased, indicating a more stable investment landscape.
However, investors should temper their expectations of the dramatic gains in Bitcoin’s early days. The halving will also directly impact miners by reducing block rewards, potentially leading to industry consolidation as smaller miners struggle to remain profitable.
Ultimately, miners will have to adapt gradually over the coming decades as Bitcoin mining becomes increasingly reliant on transaction fees.
The price of Bitcoin is likely to rise
Aimed at maintaining Bitcoin’s scarcity, the upcoming halving has historically caused prices to rise as supply declines. After previous halvings, Bitcoin rose from under $9,000 to around $60,000 in a year. However, some analysts like JP Morgan (NYSE:JPM), warned of possible price declines due to higher production costs and suggested a more cautious outlook. Nevertheless, the attention of major financial institutions has highlighted the growing importance of Bitcoin in recent years.
The Deutsche Bank (NYSE:DB) Jim Reid noted the increasing institutionalization of the crypto asset class and pointed to the influx of new ETFs. He pointed to the upcoming fourth Bitcoin halving in April, which will reduce the number of new coins available to miners to maintain scarcity, and emphasized the importance of regulatory clarity. Reid emphasized that its institutionalization is undeniable, regardless of one’s stance on Bitcoin
Historical trends suggest that halving Bitcoin’s supply typically results in a doubling of its value, making it a profitable investment strategy. Analyst Kar Yong Ang notes that Bitcoin rises about six months before a halving and peaks over a year after.
In the years following previous halvings, Bitcoin has experienced significant growth, with gains of approximately 30,000% in 2012, 786% in 2016, and 712% in 2020. However, traders should be aware of factors such as hacks, bankruptcies, market conditions, and regulatory changes could mitigate the impact of future halving events.
Mining will change fundamentally
One of the possible things that can happen during the Bitcoin halving is that the number of new Bitcoin miners will also drop from around 900 to 450. However, miners will also face hurdles such as adjusting reduced rewards and dealing with rising operational costs. Such projects can also double in value up to $40,000 after the halving.
Bitcoin mining also requires more capital-intensive investments such as infrastructure and equipment, as well as upgrades and maintenance. Mining operations rely more heavily on significant debt financing to expand their resources and maintain operations.
However, declining profit margins due to halving events can weigh on these companies and lead to bankruptcies and industry consolidation. The 2024 halving is expected to reinforce this trend, especially given the influx of new market participants and increasing reliance on asset-backed loans during the recent crypto bull market.
Bottom line
While miners anticipate the impact of the halving, investors remain uncertain about its impact. Some may be mimicking strategies from 2016, while others may choose to buy Bitcoin ahead of the event. Predicting BTC price movements post-halving is proving difficult due to the evolving nature of the market, highlighting the importance of making prudent investment decisions.
Bitcoin halving events, which have occurred approximately every four years since 2012, are crucial for reducing inflation and maintaining demand. While these events have historically been beneficial for investors due to the resulting price changes, they have posed challenges for smaller miners by reducing block validation rewards.
Given their significant impact on Bitcoin price dynamics, investors need to be aware of the upcoming halving events and invest accordingly.
At the time of publication, Chris MacDonald did not hold, directly or indirectly, any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publication policies.