Bitcoin Halving 2024: Understanding its Impact on Price

Bitcoin Halving 2024: Understanding its Impact on Price and the Cryptocurrency Ecosystem

Bitcoin-halving is a pre-programmed and integral part of Bitcoin's design. There is currently a lot of crypto-community focus on the next halving event, the 4th halving since Bitcoin's creation, estimated to take place around April 20th 2024.

Why is there so much focus on the "halvening" as it is sometimes called, and how and why does Bitcoin halving happen?

What is Bitcoin Halving?

At its fundamental level, Bitcoin halving is a mechanism embedded within the Bitcoin protocol to systematically reduce the rate at which new bitcoins enter circulation. New Bitcoins are "mined" as a result of complex (and energy intensive) computational problem solving. Despite not being explicitly stated in the Bitcoin White Paper written by 'Satoshi Nakomoto', what is in Bitcoin's design is it's increasingly complexity and difficulty to mine.  At a predetermined interval of approximately four years, triggered after every 210,000 blocks are mined, a code update is applied which decreases the rewards for mining new blocks by half. 

Bitcoin launched in 2009 with a block reward of 50 bitcoins. (A block is a record of the most recent cryptocurrency transactions, with a table and rows of data for that block. Each block contains the information from the block that preceded it in hashed form, collectively al lthe blocks are known as 'the blockchain').

The halving mechanism is designed to control Bitcoin's supply. Currently about Subsequent halving events have progressively reduced the block reward.

• 2012: First halving, reward reduced to 25 bitcoins (BTC) per block.
  
  
• 2016: Second halving, reward reduced to 12.5 BTC per block.
  
  
• 2020: Third halving; reward reduced to 6.25 BTC per block.
  
  
• 2024: Fourth halving; it is expected that the reward wil halve again to 3.125 BTC per block.

Why Does Bitcoin Halving Happen?

There are currently approximately 19.5 million bitcoins in circulation (out of a total possible of 21 million), with new tokens being mined at a current rate of approximately 900 per day. Post the next halving event in April 2024, the mining rate will reduce to around 450 bitcoins entering circulation each day. Experts predict that the last bitcoin will be mined around 2140. 

Scarcity and Controlled Supply:
Unlike fiat currencies, where central banks have the power to print money without limits, Bitcoin has a hard cap of 21 million coins. The halving process introduces a critical element of scarcity by slowing down the rate of new coin creation. It is estimated

Mining Incentives and Network Security:
Miners invest significant computational resources in securing the Bitcoin network. Bitcoin halving works to ensure the network's long-term decentralisation and security by shifting their income structure from primarily block rewards to a combination of block rewards and transaction fees.

Economic Model and Stability:
The halving mechanism injects a deflationary aspect into Bitcoin's economic system. As supply growth slows down, so too does inflationary pressure, making Bitcoin an attractive hedge against the inflationary practices often observed in traditional fiat currencies.

What is the impact of Bitcoin's halving on its price?

Historical Trends and Volatility
Bitcoin's price historically has appreciated after a halving event. Currently, the average cost of mining 1 bitcoin sits at around $26,500. After halving the cost would double to $53,000 (according to strategists at JP Morgan).

2016 Halving: In the years following the 2016 halving, prices surged from approximately £500 to a high of nearly £15,000 in late 2017. This surge was influenced by factors such as increased media exposure, growing retail interest, and the entry of institutional investors into the market.

2020 Halving: Bitcoin experienced a surge from around £5,500 to over £8,000, driven by renewed market optimism, a growing awareness of Bitcoin's potential, and the increasing interest from both individuals and early institutional investors. The last halving, in May of 2020, was followed by bitcoin's last bull run that ended in a record Bitcoin price of almost $69,000 in November 2021. (However, that bull run must be seen in the context of that period also coinciding with a rally in other risk assets.)

It's important to remember that these surges can be interspersed with corrections or periods where the price stagnates, even within a longer-term upward trend.

The period following a halving event often sees increased market attention and speculative activity. Investors anticipate potential price increases, leading to buying pressure. This demand-supply dynamic can result in significant price volatility. Even amidst generally upward price trends, periods of price drops or consolidation are entirely possible around halving events.

Supply and Demand Dynamics

Basic economics tells us that a reduction in supply, with demand remaining constant or increasing, can lead to price appreciation. Bitcoin halving creates this "supply shock," where the limited availability of new coins entering circulation potentially drives prices higher.

Miner Selling Pressure

Miners face a temporary readjustment period after a halving. They may need to sell a portion of their earned bitcoins to cover costs, which can introduce a short-term increase in the circulating supply of Bitcoin and potentially put downward pressure on price.

Market Sentiment and Speculation

Increased attention surrounding halving events often generates a strong wave of sentiment within the market. This can spark a self-fulfilling cycle, with investors buying in anticipation of further price rises.

2012 Halving:

The first halving in 2012 marked a significant milestone for Bitcoin. At this point, the cryptocurrency was still in its nascent stage, with a relatively small user base and limited mainstream adoption. The price leading up to the 2012 halving was relatively stable, hovering around $10–$12 per Bitcoin. However, in the months following the halving, Bitcoin's price saw a remarkable surge. By the end of 2013, Bitcoin reached an all-time high of over $1,100.

This surge was driven by several factors. Firstly, the halving event itself created a sense of scarcity, leading to increased investor interest. Additionally, the wider crypto community was becoming more aware of Bitcoin's potential as a decentralised digital currency. Media coverage also played a role, with Bitcoin gaining attention in mainstream news outlets.

2016 Halving:

The second halving, which occurred in 2016, saw a more mature Bitcoin ecosystem compared to 2012. By this time, Bitcoin had gained wider recognition and acceptance. The price leading up to the 2016 halving showed a similar pattern of stability, with Bitcoin trading around $400–$700.

Post-halving, Bitcoin's price began a steady climb. Throughout 2016 and into 2017, Bitcoin saw remarkable growth, reaching an all-time high of nearly $20,000 in December 2017. This surge was fueled by a combination of factors, including increased institutional interest, the launch of Bitcoin futures contracts, and growing mainstream awareness.

2020 Halving:

The most recent halving in 2020 occurred amidst a backdrop of global uncertainty due to the COVID-19 pandemic. Leading up to the halving, Bitcoin's price oscillated between approximately $6,000 and $10,000.

Following the 2020 halving, Bitcoin's price initially remained relatively stable. However, as the year progressed, Bitcoin began an upward trajectory. By December 2020, Bitcoin had surpassed its previous all-time high from 2017, reaching over $23,000. This surge continued into 2021, culminating in an all-time high of nearly $69,000 in April. As mentioned above, this rally was in the context of a broad market asset rally across equities and other asset classes in a low interest rate environment and government 'helicopter money' as a reaction to the COVID pandemic.

Volatility Around Halving Events

Periods surrounding halving events are characteristically volatile. 

During the weeks leading up to a halving, there is typically a buildup of excitement and speculation within the crypto community. This anticipation can lead to increased trading activity and price volatility. After the halving occurs, the market's reaction can vary. In some cases, there is an immediate price surge as investors respond to the reduced supply of new coins. However, there can also be periods of consolidation or even temporary price declines as the market adjusts to the new supply dynamics. JP Morgan analysts said in a February 28th research note that bitcoin's price could fall as low as $42,000 post April's halving event. 

Long-Term Price Trends

While short-term volatility is a common feature around halving events, many Bitcoin proponents focus on the long-term price trends. The reduction in supply due to halving events, coupled with growing adoption and institutional interest, is seen by many as a recipe for long-term price appreciation.

Potential Scenarios

Looking ahead, several potential scenarios could unfold around future halving events. If the historical pattern holds, we may see continued price appreciation following halving events. Additionally, as Bitcoin's market cap and adoption continue to grow, the impact of each halving could become even more pronounced.

However, it's important to approach these scenarios with caution. The cryptocurrency market is notoriously volatile, and past performance is not always indicative of future results. External factors, such as regulatory developments and macroeconomic trends, can also influence Bitcoin's price dynamics.

Miner Behaviour

Halving events significantly impact how miners operate. With a sudden 50% reduction in block rewards, miners need to adapt and strategically adjust their operations to maintain profitability. These adjustments might include:

• Upgrading Equipment: Investing in newer, more efficient mining hardware (like ASICs with higher hash rates) to increase returns and reduce operational costs.
  
  
• Joining Mining Pools: Combining their computing resources with other miners in pools to improve their chances of securing block rewards. Smaller miners especially rely on pools to remain competitive post-halving.
  
  
• Diversifying Holdings: Miners might diversify their holdings with other cryptocurrencies to broaden their portfolios and hedge against volatility. This could include both major altcoins, like Ethereum, and smaller projects with potential.
  
  
• Consolidation and Innovation: Smaller mining operations may find it difficult to compete in a post-halving landscape. This could lead to consolidation within the industry, with larger mining companies acquiring smaller ones. However, we might also see smaller miners pursuing innovative strategies
  
  
  • Relocation: In order to cut operating expenses, miners search for regions with cheaper electricity rates.
    
    
  • "Green Mining": This is when miners explore renewable energy sources (solar, geothermal) or find ways to utilise waste energy to reduce costs and appeal to the growing number of environmentally conscious investors.
    
    

Real-World Impacts

Bitcoin halving events can have implications that extend beyond the cryptocurrency itself:

• Businesses: Companies accepting Bitcoin as payment might adjust their pricing models in response to the shifting value of Bitcoin around halving events.
  
  
• Individuals: Investors holding Bitcoin might see significant fluctuations in the value of their asset. Halving can potentially lead to short-term volatility, followed by long-term appreciation.
  
  
• Wider Adoption: The attention a halving generates could lead to major companies or even smaller nations exploring Bitcoin adoption as a potential investment or reserve asset.
  
  

The potential impact of Bitcoin halving on real-world adoption can be illustrated through hypothetical scenarios. For example, consider Tesla's significant Bitcoin investment in early 2021. While driven by a variety of factors, the company's decision to allocate a portion of its treasury reserves to Bitcoin could have been partially influenced by the 2020 halving. This event underscores Bitcoin's growing appeal as a potential long-term store of value due to its limited supply.



Expert Opinions

Analysts hold diverse viewpoints on the economic implications of Bitcoin halving events:

• Scarcity and Potential Price Support: Many experts see halving events as reinforcing Bitcoin's scarcity and highlighting its appeal as a potential long-term store of value, particularly when compared to inflationary fiat currencies.  This supply control mechanism could support price appreciation over time.
  
  
• A Word of Caution:  Others express caution, pointing out that the cryptocurrency market remains inherently volatile and past halving patterns don't guarantee future outcomes. Factors such as regulatory changes or broader economic uncertainty can also influence prices in ways that may offset the supply-side effects of halving.
  
  

"Whether you're a cynic or a convert, whether you think it's cheap or in a bubble, what's clear is that bitcoin is becoming increasingly institutionalised." Deutsche Bank's Jim Reid

The Bigger Picture: Long-Term Price Growth

Beyond the immediate price fluctuations, many proponents of Bitcoin highlight the significance of halving events regarding long-term price appreciation. The combination of a diminishing supply of new bitcoins, along with increasing adoption by individuals and institutions, is seen by some as a recipe for long-term growth. This perception drives the view of Bitcoin as a store of value and a potential hedge against broader economic uncertainties.

The Broader Cryptocurrency Ecosystem

Bitcoin halving doesn't exist within a vacuum. The trends and sentiment surrounding Bitcoin often play a major role in influencing the broader cryptocurrency market.

• Spillover Effects: Increased attention around Bitcoin halving can have positive spillover effects on other cryptocurrencies. Investors may increase their exposure to a range of cryptocurrency assets.
  
  
• Altcoin Interest: Smaller cryptocurrencies, known as altcoins, sometimes experience increased interest as investors look for alternative investments to Bitcoin.
  

The Future of Bitcoin Halving

Bitcoin halving events are predicted to continue until approximately the year 2140, when the final bitcoin will be mined. As the block rewards continue to decrease with each halving, the role of transaction fees in the Bitcoin network will become even more crucial. As halving events continue far into the future, the diminishing block rewards will eventually become negligible. This raises questions about how Bitcoin's network will remain secure and decentralised when miners are primarily incentivized by transaction fees. Some speculate this could lead to increased centralisation within the mining landscape or necessitate a shift towards alternative consensus mechanisms.

Conclusion

Bitcoin halving embodies a fundamental pillar of the cryptocurrency's design. Through a controlled approach to inflation management, calculated incentive structures, and the careful implementation of scarcity principles, halving events continue to shape Bitcoin's price trajectory and its broader role within the evolving financial landscape. While these events can bring periods of volatility, the long-term vision of Bitcoin as a decentralised, deflationary digital asset remains a powerful force driving its adoption and potential.

Author

Sam Low is the Founder of LiquidityFinder. With over 18 years in working with FX trading technology, Sam has deep experience in the FX (forex) trading industry, working with brokers, liquidity providers and end traders themselves.  You can message Sam directly here.