The new entrants into Bitcoin via the recently launched ETF and prices jumping back to $50,000, this is a good time to dig a little into the Bitcoin halving as we are expected to enter another halving event in the middle of April will go.
The Bitcoin halving cycle refers to the recurring event that reduces the blockchain rewards paid in bitcoin and given to miners for validating transactions and creating new blocks on the blockchain. This reduction occurs approximately every four years, specifically when the number of total blocks on the Bitcoin blockchain reaches a certain threshold, currently set at 210,000 blocks.
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The halving event aims to maintain the scarcity of Bitcoin by gradually decreasing the rate at which new Bitcoins are put into circulation. Ultimately, this process will result in a total of 21 million Bitcoins being mined, with no Bitcoins being generated after the final halving event.
The general consensus is that Bitcoin halving events are positive for the price of Bitcoin, and historically they have been. The event often generates optimism among crypto investors, which subsequently leads to positive price action. This positive price movement can be attributed to several factors. First, the reduction in the supply-issuance rate highlights Bitcoin’s scarcity, which can drive demand and consequently increase its price.
In addition, the halving event brings attention to the crypto space, attracts new investors and contributes to increased trading activity. However, it is important to note that while the halving has historically led to price increases, the magnitude of these increases may decrease with each subsequent halving.
To take a closer look at the effects that Bitcoin halving periods have had on the distribution of returns, we looked back from July 2010 to February 2024 using the CoinDesk Indices Bitcoin XBX Price Index, and compared the distribution of weekly returns from each halving period as which bitcoin increased in value from 0.1 to recent levels of 50k USD per BTC.
July 2010 – October 2014 period used BTCUSD prices from Investing.com; Yield outliers of 0.5% and 99.5% have been removed for distribution illustration purposes.
From overlaying these distributions, and comparing annual return and volatility, we can see that as the distribution of returns has narrowed as the bitcoin market has matured from a crypto-enthusiast hobby to a real asset with institutional interest. This evolution can also be seen in the decrease in both returns and volatility over each subsequent halving, while Return per Volatility held more constant after the first halving. This evolution suggests that investors should not expect similar performance gains in Bitcoin that were experienced when the market was in its early stages before 2012.
One area of the market directly affected by the halving event is the Bitcoin miners, through an immediate halving of block rewards for new blocks. This reduction in mining rewards can affect miners’ income and profitability, as miners may face greater competition and higher operating costs, potentially leading to consolidation within the mining sector. Smaller miners may struggle to remain profitable, while larger players with greater resources, cheaper sources of electricity and economies of scale may dominate the industry.
Looking beyond the halving events, the future of Bitcoin mining will eventually transition to relying solely on transaction fees once all 21 million Bitcoins have been mined. This shift will occur approximately 31 years after Bitcoin’s inception. Miners will have to adapt to this change to rely solely on transaction fees, although this will be a gradual change from each halving.
Innovations in the crypto space, such as additional protocols and tokens that coexist with Bitcoin (e.g. Ordinals), can provide opportunities for miners to diversify and optimize their mining operations to maintain income outside of Bitcoin block rewards.
We’ve come a long way in the evolution of Bitcoin from a cypherpunk and cryptography enthusiast hobby to a digital-scarce store of value with its own spot ETFs and regulated derivatives markets. That said, through market cycles, and increases in market capitalization, the volatility of the asset has decreased. We must therefore temper our expectations when analyzing historical halving cycles, as Bitcoin holders today are very different from holders in 2010.
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.
Ultimately, any crypto adventure you embark on is yours alone. We’re just happy to be your crypto companion, cheering you on from the sidelines (and maybe sharing some snacks along the way). So research, explore, and remember, with a little knowledge and a lot of curiosity, you can navigate the crypto cosmos like a pro!
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