Bitcoin’s “halving” is expected to happen soon. But its potential impact depends on your relationship to the coin; this is likely to affect miners and investors differently.
“For the people who own bitcoin because they think it’s a good store of value, this halving isn’t that big of a deal. But for the miners, it’s a big deal,” Omid Malekan, an adjunct professor at the Columbia Business School and author of “Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets and Platforms,” tells CNBC Make It.
Miners receive bitcoins, known as block rewards, to verify and validate transactions and keep the blockchain network secure. The miners who receive it can then keep, trade or sell it. This is also how new digital coins come into circulation.
Since there will only be 21 million bitcoins, the halving is a technical event written into bitcoin’s code that halves the block reward miners receive every four years. In 2009, miners were rewarded 50 bitcoin. In 2012 they were rewarded 25 bitcoin, in 2016 they received 12.5 and in 2020 they received 6.25.
Here’s how the halving could affect both investors and miners.
What the bitcoin halving could mean for investors
While the halving itself does not have a direct impact on bitcoin’s price, investors’ anticipation of the event can lead to highly volatile price movements, said Douglas Boneparth, a certified financial planner and president of Bone Fide Wealth. Boneparth has also held bitcoin since 2014.
“As the halving approaches, speculation typically increases, potentially leading to increased volatility in the bitcoin market,” he says. “Investors can buy into bitcoin in anticipation of potential price increases, but there is no certainty or guarantee of that and, frankly, it just adds to the volatility.”
Moreover, it is difficult to pinpoint exactly what drives bitcoin’s price fluctuations and declines. Unlike stocks and bonds, cryptocurrency does not derive its value from an underlying asset.
Although the halving creates more scarcity, bitcoin does not exactly follow the typical rules of supply in demand.
“You would think that a limited supply always means the price goes up, but that’s not true,” says Boneparth. “If that’s your thesis, you’re not taking into account a host of factors that can move the price of bitcoin on any given day.”
What bitcoin’s halving could mean for miners
In 2024, the block reward will be reduced to 3,125 bitcoin, which is worth approximately $200,122 as of April 19 at the time of publication.
Since bitcoin mining usually requires expensive hardware and a large amount of energy, it can be an expensive endeavor. Therefore, some miners will have to weigh their costs against the potential payout, Malekan says.
While miners can earn income from transaction fees, they make the majority of their money from block rewards, which will essentially be cut in half after the halving, he says.
“Miners need their revenue to be more than their costs, like any business,” says Malekan. “What will probably happen after the halving is that some miners will no longer be profitable, and they will stop mining.”
Invest with caution
If you are interested in investing in bitcoin, tread carefully when it comes to delving into the world of crypto.
Although bitcoin’s price briefly hit a record high in March, its past performance should not be used to try to predict how well it might do in the future, as with any financial asset.
And since crypto is considered a highly volatile asset subject to wild price swings, there is no guarantee that you will be able to earn a profit from your investment.
“You’re dealing with something that’s very volatile and if you’re not careful, it might not work out if you’re trading bitcoin in the short term,” says Boneparth.
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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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