What is Bitcoin halving – and how does it affect the price?

Rather than being determined by dates, a halving event occurs automatically when the number of blocks the network has processed reaches 210,000.

The first Bitcoin halving took place on November 28, 2012, and the block reward dropped from 50 Bitcoins to 25 Bitcoins. The second halving took place on July 9, 2016 and cut the block reward from 25 Bitcoins to 12.5 Bitcoins. The third halving took place on May 11, 2020 and dropped the mining rewards from 12.5 Bitcoins to 6.25 Bitcoins.

The latest took place on April 19, 2024 and dropped the mining rewards from 6.25 Bitcoins to 3.125 Bitcoins.

The reason for halving events is that Bitcoin is finite. There will only be 21 million Bitcoin in existence – this was written into the code when it was first created. The halvings will continue until all Bitcoins have been established through the block rewards, meaning it could take until the year 2140 to complete mining.

However, each event presents challenges to the profitability of miners, who face diminishing rewards for their efforts.

Halvings lead to increased attention and speculation about the crypto world and how it will affect market value.

The events reduce the incentive for ‘bitcoin miners’ to continue their activities, this could create a supply shortage if demand remains steady or increases. This typically led to an increase in the price of Bitcoin.

In the month before the most recent halving event in April 2024, the price of Bitcoin hit an all-time high, surpassing $69,000 (£54,353) for the first time in its history, surpassing the previous record reached in November 2021. surpass.

However, price increases have been spurred in part by a move in America to allow US securities firms to launch ETFs that invest in Bitcoin, bringing cryptocurrencies further into mainstream investing.

Since the US regulator, the Securities and Exchange Commission (SEC) approved the first spot Bitcoin ETFs in January, several funds have been launched, including ETFs from big brands such as BlackRock, Fidelity and Invesco.

After the previous Bitcoin halving in May 2020, the cryptocurrency market went on a bull run, with the price of Bitcoin increasing fivefold in the following calendar year.

The limited number of Bitcoins that can enter circulation makes them a so-called “scarce asset”, which is enough for some people to make them valuable.

Simon Peters, cryptocurrency market analyst at investment platform eToro said: “The limit on the number of Bitcoins is actually less than 21 million. This number is closer to 17 million because so much was lost on hard drives and memory sticks where investors mined their own Bitcoin or have taken custody of it themselves, rather than holding it via a platform.

“Rare assets, such as crypto, real estate and gold, are attractive to investors because they generally increase in value. The halving events in crypto mean that there are known price changes coming, with the peak increases coming about 12-18 months after such an event. The pressure on supply has certainly had an impact, although there are many other factors for prices, with crypto being a global asset.

Cryptocurrency markets are notoriously difficult to predict with large price swings occurring, sometimes without much warning. Timing an investment is a full time job and even then it is impossible for a professional to know exactly where the market is going.

As a halving event approaches, existing investors may consider offloading some Bitcoin if they need to raise cash for something or want to make a profit.

But again, you have to consider that cryptocurrency prices are extremely volatile and unpredictable, so you can’t count on prices rising as they have in the past as external, broader economic factors factor in.

Don’t forget that there are tax implications of selling Bitcoin, which should be a consideration in terms of timing. Cryptocurrency is treated as a form of investment, and regulated in a similar way to stocks and shares.

As such, gains on the sale of some or all of your crypto holdings will trigger capital gains tax (CGT) on top of the £3,000 annual CGT allowance.

In December, HM Revenue and Customs (HMRC) launched a voluntary disclosure campaign, encouraging investors who had not declared any profits from crypto-assets to come forward and pay up.