Bitcoin Halving 101: The 3 Most Important Things to Know About the April Event

Looking back, 2024 could be one of the best years for cryptocurrencies. We won’t know until the year is over, but one thing is for sure – Bitcoin (BTC-USD) is on a roll.

The world’s largest cryptocurrency has risen more than 65% to start the year, and is now trading above the $73,000 level. That move was fueled by continued capital inflows into this digital asset via spot Bitcoin ETFs. Approved by the Securities and Exchange Commission in January, institutional investors have poured into these funds as investors scramble to gain exposure to crypto.

This increased demand comes at a time when many investors expect Bitcoin to become even more scarce. The crypto’s upcoming halving, in which mining rewards will be cut in half for Bitcoin miners. So we could have a higher price spiral, or at least that’s what the market expects.

Let’s dive more into what this Bitcoin halving — or halving — is, and why it matters to investors.

Significance of the Bitcoin Halving

In simple terms, Bitcoin halvings occur approximately every four years. These halving events result in a 50% reduction in newly issued Bitcoin. With approximately 19.5 million Bitcoin already minted and a cap of 21 million put in place when the token was first created, the cost of mining new Bitcoin will increase dramatically. It is a feature of Bitcoin’s fundamentals, and not a bug, that drives much of the appreciation this token has seen in the past.

Since there will only be 21 million Bitcoins circulating in the market, the fact that fewer new bitcoins will be created is a big problem. Scarcity matters, especially for stores of value like Bitcoin. So, the recent price increase that we are seeing certainly makes sense.

Impacts of the Bitcoin Halving

With Bitcoin’s inflation rate dropping by 50% essentially overnight, this is one asset class that investors can count 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 periods of inflation. This is another important aspect of this halving that is less discussed, but I think just as important.

However, this mechanism does not protect Bitcoin users from inflationary effects when converted to fiat currency for transactions. Inflation will still exist whether consumers like it or not. But for those looking to park capital for periods of time, Bitcoin certainly looks like a compelling option given its run into the halving.

Driven by possible profits, investors are now flocking to the cryptocurrency market. This also creates an unexpected demand for Bitcoin. However, investing in Bitcoin can become more speculative as participants seek to capitalize on potential value increases through halving events. So, some caution is warranted here.

Miners, whether individuals or companies, have traditionally found Bitcoin mining profitable due to the rewards the parties receive. However, halving events reduces those rewards, potentially affecting profitability. The reduction also adds more challenges in large-scale mining operations. If this happens, more substantial investments are required, including but not limited to maintenance, equipment and upgrades.

3 things to know about the April event

Now that we know the importance and relevance of the most anticipated Bitcoin halving, investors should know that the event alone is not only the solution and basis for determining Bitcoin’s price.

Although there can be many market factors that can cause and happen after the halving event, the macroeconomic conditions also affect the price of Bitcoin. As the event slowly approaches, investors should expect more volatility, a strong rise in Bitcoin price and impact on mining in general.

Volatility is likely to increase

Historical data suggests that Bitcoin has undergone remarkable price fluctuations during halving years, with past trends indicating upward movements. However, it is essential to recognize the potential for contrasting outcomes based on historical precedent.

As the newly launched ETF drives Bitcoin prices back, attention turns to the impending halving event in mid-April. The Bitcoin halving cycle, which occurs roughly every four years or every 210,000 blocks, reduces blockchain rewards for miners, with the goal of maintaining Bitcoin’s scarcity. With each halving, the rate of new Bitcoin introduction decreases, eventually capping the total supply at 21 million Bitcoins.

The event attracts new investors and boosts trading activity, yet may reduce its impact on price increases. By examining the returns from July 2010 to February 2024, we assessed how halving periods affected Bitcoin’s price distribution.

Analyzing the distributions of returns and volatility over time reveals the aging of the Bitcoin market from a niche interest to a mainstream asset. With each halving event, returns and volatility have decreased, suggesting a more stable investment landscape.

However, investors should temper expectations for dramatic gains seen in Bitcoin’s early days. Halving also has a direct impact on 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 shifts to reliance on transaction fees.

Bitcoin’s price should trend higher

Intended to preserve Bitcoin’s scarcity, the upcoming halving has historically led to price increases as supply dwindles. After previous halvings, Bitcoin rose from less than $9,000 to around $60,000 within a year. Some analysts, such as JPMorgan (NYSE:JPM), warned of potential price declines due to higher production costs, suggesting a more cautious outlook. Nevertheless, the attention of major financial institutions has highlighted the growing significance of Bitcoin in recent years.

Deutsche Bank’s (NYSE:DB) Jim Reid noted the growing institutionalization of the crypto asset class, citing the influx of new ETFs. He highlighted the upcoming fourth Bitcoin halving in April, the reduction of new coins available to miners to maintain scarcity, and stressed the importance of regulatory clarity. Reid stressed that its institutionalization is undeniable regardless of one’s stance on Bitcoin

Historical trends indicate that halving the supply of Bitcoin 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 event and peaks about a year after.

In the years following previous halvings, Bitcoin experienced significant growth, with increases of around 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 that impact of future halving events can be mitigated.

Mining will fundamentally change

One of the possible things that could happen during the Bitcoin halving is that the number of new Bitcoin miners will also decrease from around 900 units to 450. However, miners will also experience obstacles, such as adjusting to reduced rewards and managing a rising operating costs. Such projects can also double to $40,000 after the halving event.

Bitcoin mining also requires more capital-intensive investments, such as infrastructure and equipment, as well as upgrades and maintenance. Mining operations rely more on significant debt financing for more fund expansion and sustaining operations.

However, declining profit margins due to halving events can strain these firms, leading to bankruptcies and industry consolidation. The 2024 halving is expected to reinforce this trend, especially considering the influx of new entrants and increased reliance on asset-backed lending during the recent crypto bull market.

Bottom line

While miners anticipate the impact of halving, investors remain uncertain about its effects. Some may mimic strategies from 2016, while others choose to buy Bitcoin ahead of the event. Predicting BTC’s price movements after halving is proving to be challenging due to the market’s evolving nature, underscoring the importance of prudent investment decisions.

Bitcoin halving events, which have occurred roughly every four years since 2012, are crucial to reducing inflation and maintaining demand. While historically beneficial to investors due to resulting price changes, these events have posed challenges for smaller miners by reducing block validation rewards.

Considering their significant impact on Bitcoin’s price dynamics, investors should be aware of upcoming halving events and invest accordingly.

As of the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publishing Guidelines.