Bitcoin halving: what it is and its potential impact on prices

The cryptocurrency Bitcoin underwent a technical change in late April, and some traders are speculating that the change could help boost the price of the world’s largest cryptocurrency. Known as a “halving,” this change reduces the rate at which Bitcoin miners can produce new coins.

Here’s how the Bitcoin halving could affect the crypto’s price and what investors need to know.

What is a Bitcoin Halving?

Bitcoin is a cryptocurrency that exists only digitally, and it is managed by a series of computers in the network that track, manage and issue the currency. This network verifies transactions using the currency, ensuring the integrity of the system and ownership of the coins. New bitcoins are issued when high-powered computers called Bitcoin miners process complex math problems.

The reward for solving these math problems is predetermined, set in the computer code that governs Bitcoin when it was founded. As part of that reward schedule, the reward rate is cut in half every four years – called a halving – with events in 2012, 2016, 2020, 2024 and so on.

Miners thus receive fewer and fewer bitcoins over time as they solve these complex problems, until Bitcoin’s total issuance of 21 million coins is reached, in approximately the year 2140. So far, about 19.7 million bitcoins have been issued, according to CoinMarketCap. com.

At the beginning of 2024, Bitcoin miners received 6.25 bitcoins for correctly solving a problem and adding a block to the blockchain. After the halving on April 19, 2024, they only earn 3,125 coins. This change reduces the payout to successful miners from about $400,000 to about $200,000.

This series of halvings will continue in the future, further reducing the issuance of new coins.

What Does a Bitcoin Halving Mean for Traders?

The slowing issuance of new bitcoins through a halving highlights the fundamentally deflationary nature of the cryptocurrency. With a fixed supply of just 21 million coins – including millions thought to be lost forever – Bitcoin is deflationary. That is, because the supply is relatively fixed in the short term, its price in dollars tends to rise as long as the demand for the crypto rises.

Short-term traders looking to play the halving may find it especially difficult because the excitement about the event may have already been priced into the price – even months ago.

Markets are forward-looking and often anticipate events long before they appear in the financial press. For example, in the months leading up to the official approval of Bitcoin ETFs in January, Bitcoin skyrocketed. And the halving is the definition of an event that has been known for a long time.

The halving itself does not introduce new information or adjust the issuance rate of new bitcoins other than what is already established in Bitcoin’s code. It is a “known known” and therefore may have been factored into the price some time ago.

In the short term – and especially with an asset driven entirely by sentiment – ​​the price can do anything. However, Bitcoin tends to rise and fall with changes in risk appetite, especially when driven by interest rates. Anything that raises traders’ “animal spirits” and makes them buy more bitcoins directly or via Bitcoin ETFs also tends to sap the price of Bitcoin.

So anyone predicting a price target on Bitcoin or any other purely speculative asset is just guessing. Because Bitcoin is not backed by anything fundamental like the cash flow of an underlying business, its price is ultimately driven only by changes in sentiment – nothing else.

Therefore, for the price of Bitcoin to rise, more traders and more money must flow into the asset. This is what investors call the “bigger fool theory of investing,” since the only way to make money is to sell it to someone who is more optimistic than you. This lack of a fundamental support is why legendary investors like Warren Buffett won’t touch Bitcoin or other cryptocurrencies.

A more interesting question is whether Bitcoin has long-term staying power. While its deflationary and volatile nature renders the coin unusable as a currency, it can still act as a long-term store of value, if enough people decide it can retain its value.

The answer to this question rests solely on whether money is still flowing into the crypto. Given the fixed supply of Bitcoin – and the increasing difficulty of mining new coins as part of this halving and later – any increase in money flowing into Bitcoin will tend to increase its price.

The most important thing to watch long-term is how much money – especially how much institutional money – is flowing into Bitcoin and Bitcoin-related assets such as funds. From this perspective, the halving is a non-event, although it may affect Bitcoin’s price higher or lower in the short term.

Does a Bitcoin Halving Affect the Crypto’s Fundamental Value?

Bitcoin is not backed by the assets or cash flow of some underlying entity, unlike a stock, which is a fractional ownership stake in a business. Thus, Bitcoin by its very nature has no fundamental value. Its price is only supported by traders and others who buy the crypto-coin in the hope of selling it to other traders, who also hope to sell it to still other traders for a profit, and so on.

So a Bitcoin halving cannot affect Bitcoin’s fundamental value because it has nothing to begin with. Again, the only way Bitcoin has a price is because traders decide it’s worth something.

Of course, the halving has some effects on the Bitcoin ecosystem. For example, the reduced reward for miners means that Bitcoin’s price will have to rise over a longer time frame for miners to continue mining profitably. In the short term, this may do little for Bitcoin’s price, but may encourage miners to produce less until the price rises to at least cover their production costs.

This is not to say that a halving will not increase the price of Bitcoin. A halving could highlight the declining rate of issuance of Bitcoin, drawing more money into the sector, as traders anticipate a change in market sentiment and a rally in the crypto’s price. But the key driver is more money moving into the sector, not a fundamental change in the value of Bitcoin itself.

It’s worth reiterating that supply issues – more or less total coins, for example – are not the key driver of crypto prices. Demand is the only ultimate driver of crypto prices. If demand dried up overnight, crypto-assets would be worthless, no matter how abundant or limited their issuance.

Bottom line

Those looking to trade the Bitcoin halving could find themselves on the wrong side of a move as the market may have already priced in any changes in sentiment well ahead of time. However, those who believe that Bitcoin remains an attractive long-term investment should monitor the ongoing flow into the asset while understanding the significant risks of owning it.

Editorial disclaimer: All investors are advised to conduct their own independent research on investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.