Approximately every four years, the creation of bitcoin decreases by 50% during what is known as the halving. Bitcoin’s fourth halving is on the horizon, which will happen at the end of April. What implications could reduced production have on the market value of the asset? Haan Palcu-Chang of Purpose Investments provides his perspective on this event and the spot bitcoin ETF market considerations.
In this article, we refer to both Bitcoin and bitcoin – for clarity, Bitcoin refers to the blockchain network while bitcoin refers to the cryptocurrency.
Sometime in April this year, we will likely see Bitcoin’s fourth halving event take place. This event significantly changes the supply dynamics of bitcoin and has historically been linked to price increases for bitcoin and the broader crypto space. Below we will explain what a Bitcoin halving is and what its potential implications are for investors.
What is a Bitcoin Halving?
At a high level, a Bitcoin halving is when the introduction of new bitcoins into circulation is reduced by half. This happens roughly every four years, and this schedule will continue until the last bitcoin is mined sometime around 2140. The supply is limited to 21 million BTC. This mechanism was designed by Bitcoin’s creator(s) as a way to enforce scarcity and deflationary properties of bitcoin. The idea is that, as long as the adoption of the Bitcoin network grows over time, a mechanism like this will ensure that the laws of supply and demand will consistently increase the value of the asset. In this sense, the monetary policy of Bitcoin can be considered designed to be a counterweight or alternative to fiat money, which historically devalues over time. That is, what you can buy with a US dollar today is much less than what you could buy with a dollar 100 years ago.
The Meaning of the 4th Bitcoin Halving for Investors
Historically, halving events have been precursors to significant price rallies in bitcoin. The reality is that since its inception a decade and a half ago, bitcoin has steadily grown in adoption. And the deflationary nature of bitcoin circulation has meant that these supply and demand dynamics have resulted in bitcoin’s price rising after each of its previous halvings. While past performance can never be a complete indicator of future results, it is very important to understand the potential implications of a disinflationary asset that is only growing in adoption.
Market sentiment and speculation
Anticipation of the halving event may also lead to increased interest in bitcoin, and this comes with the inevitable increase in speculation and the potential for a “sell the news” event. As we saw in the build-up to the green light of US spot bitcoin ETFs in January – another event that put a huge spotlight on bitcoin – prices rose in anticipation of an SEC approval. When the funds were approved, a large short-term self-off occurred, causing the price to drop sharply. Bitcoin’s price has since recovered from the selloff; however, the point remains that investors should be wary of market sentiment and speculative trends leading up to the halving in order to position themselves in a way that best supports their bitcoin investment thesis.
Understand the long-term investment perspective
Looking long-term at a time horizon of five or 10 years, it becomes even more compelling to understand what Bitcoin halvings do to the supply of bitcoin. Yes, seeing a price increase within a few months or weeks of the halving is exciting. But the real takeaway here is what these halvings do for the rarity of the asset. When we zoom out and look at the fact that broad retail and institutional access to bitcoin was only made possible in the US a little over a month ago with the approval of spot bitcoin ETFs, we begin to understand how much future demand about the next few years may possibly come into the asset class.
The upcoming Bitcoin halving is going to have a significant impact on the number of bitcoin entering circulation. Looking at this event from a historical perspective, it is not unreasonable to assume that there will be price increases that coincide with or follow this event. However, looking long-term is most compelling as bitcoin’s programmed scarcity clashes with growing demand for the asset and greater use of the Bitcoin network.
Q: What is Bitcoin halving, and why is it important?
A: Bitcoin miners receive a set reward for validating a block. The Bitcoin halving is an important event encoded in Bitcoin protocol that occurs when the reward for mining new blocks is cut in half. This result is that the miners receive 50% less bitcoin to verify the transactions. The halving mechanism emphasizes the scarcity of bitcoin and contrasts inflationary fiat printing mechanisms.
Q: How does the halving typically affect bitcoin market activity?
A. Bitcoin halving has a multitude of impacts on the market. Primarily through supply, mining activity and market sentiment.
Q: Why might this halving be different?
A: With the recent spot ETFs approval and new inflow of institutional capital into the space through ETFs, the new daily demand significantly outweighs the current daily supply of new bitcoins. The demand for new BTC combined with the reduced supply from the halving could create even stronger upward pressure on the price.
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Disclaimer for Uncirculars, with a Touch of Personality:
While we love diving into the exciting world of crypto here at Uncirculars, remember that this post, and all our content, is purely for your information and exploration. Think of it as your crypto compass, pointing you in the right direction to do your own research and make informed decisions.
No legal, tax, investment, or financial advice should be inferred from these pixels. We’re not fortune tellers or stockbrokers, just passionate crypto enthusiasts sharing our knowledge.
And just like that rollercoaster ride in your favorite DeFi protocol, past performance isn’t a guarantee of future thrills. The value of crypto assets can be as unpredictable as a moon landing, so buckle up and do your due diligence before taking the plunge.
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