From excitement to confusion, those following the cryptocurrency market know that the halving event - the halving of the circulating Bitcoin (BTC) supply - can push the price of bitcoin to soar but can also drag the value of this asset down...
Every four years, a halving event occurs, cutting the cryptocurrency supply in half to create a scarcity effect, making BTC truly the "digital gold".
Antoni Trenchev, co-founder of the cryptocurrency exchange Nexo, said: "Halving is the most important event for bitcoin enthusiasts, but the 2024 iteration will elevate it to a new level as supply reduction combined with new ETF demand creates an explosive cocktail."
"This halving is very special because bitcoin has surpassed the previous cycle's all-time high. This has never happened at each four-year event. Therefore, trying to predict the length and severity of this cycle becomes much more difficult," Antoni Trenchev emphasized in an interview with CNBC.
After the halving of BTC in 2012, 2016, and 2020, the price of bitcoin increased approximately 93 times, 30 times, and 8 times, respectively, from the price on the day of the halving to the peak of the cycle. Past performance does not indicate future returns, and some even warn that when dealing with smaller supplies every four years, there is no evidence that previous halvings have caused the price of bitcoin to rise.
However, Steven Lubka, head of private client and family office at Swan Bitcoin, stated, "If there was ever a moment to be a little more optimistic" about post-halving returns, it would be this year.
Antoni Trenchev added: "This bitcoin bull cycle is occurring earlier due to the approval of spot ETF funds in January. And this event may be shorter and more explosive, peaking at the end of 2024 or early 2025."
Whether you want to understand more about bitcoin as a new, deflationary asset or simply want to speculate on bitcoin prices in the coming weeks, here are the things you need to know about the halving and its potential impact on the market.
THE 2020 HALVING EVENT CAUSED THE MINING REWARD TO DROP FROM 50 BTC TO 6.25 BTC
Halving is a change in the underlying Blockchain technology of bitcoin, designed to reduce the rate at which bitcoin is created and circulated, usually occurring approximately every four years. So how is BTC created?
Using computational power, miners will solve complex mathematical puzzles to build the blockchain and earn rewards in the form of new bitcoins. When halved, the number of bitcoins available as rewards for miners is cut in half. This makes mining less profitable and slows the production of new bitcoins.
Miners have two incentives to mine: transaction fees voluntarily paid by the sender (for faster processing) and the mining reward - 6.25 newly created bitcoins, equivalent to about $437,500 (value as of last week).
In the coming time, from April 18 to April 21, the mining reward will be reduced to 3.125 bitcoins. Previously, the 2020 halving event caused the mining reward to decrease from 50 bitcoins to 6.25.
The reduction in block rewards leads to a decrease in bitcoin supply by slowing the rate at which new money is created. The limited supply helps maintain the value of bitcoin akin to digital gold. Ultimately, the circulating supply of bitcoin will still only reach 21 million.
BTC VALUE MAY INCREASE AFTER THIS YEAR'S HALVING
Bitcoin always surges in the months following a halving event. That's why this day has become a celebrated event for many. However, according to CNBC, each time the mining reward and the bitcoin supply shrink, the profit from the halving day to the peak of the cycle also decreases.
The co-founder of the cryptocurrency exchange Nexo stated: "The end of bitcoin after each halving is a high-stakes sport. What we know is that every price increase following a halving has seen diminishing returns."
Conversely, Steven Lubka, head of private client and family office at Swan Bitcoin, stated that this trend could reverse this year, although it is not the result of supply shock but rather due to new demand shock. According to CryptoQuant, thanks to the emergence of bitcoin exchange-traded funds, the demand for cryptocurrency is greater than ever.
Data shows that historically, the demand for bitcoin from "whales" (including OG bitcoin users, new investors, and Bitcoin ETF holders) spikes after each halving, driving prices higher. However, this year, whale demand is at an all-time high and block rewards have not yet been cut.
Julio Moreno, head of research at CryptoQuant, stated: "The significant previous impact of the halving event on prices has diminished, as the issuance of new bitcoin has become smaller compared to the total number of bitcoins available for sale. Conversely… the growth in demand for bitcoin seems to be the main driver pushing prices higher after the halving."