Before I delve into Bitcoin halving and what it could mean for investors and traders, let’s take a brief look at how Bitcoin, a cryptocurrency, works:
- Bitcoin is a digital currency which can be used for online transactions.
- Bitcoin operates independently of a central bank, unlike fiat currencies such as the US dollar, which is backed by the US government.
- New units of Bitcoin currency are mined (generated) by computers which solve complex mathematical problems.
- Bitcoin has a finite supply of coins (21 million).
What is Bitcoin Halving?
Bitcoin halving is a technical event, written in Bitcoin code, which occurs every four years. Halving refers to the rewards for Bitcoin miners, who generate Bitcoin, being cut in half. This reduces the incentive for Bitcoin miners, with the result that fewer Bitcoins are produced. With less Bitcoin available on the market over time, Bitcoin’s price should move higher. The scarcity should make Bitcoin more valuable and can be thought of as “digital gold”.
Bitcoin, which is trading at around $63,350 at the time of writing, has been showing high volatility this year. Bitcoin soared 66% higher within the first three months of 2024 and hit a record price of $73,750 in March. However, Bitcoin has declined 8.9% so far in April, despite all the excitement leading up to the halving event.
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What Will Be the Impact of Bitcoin Halving?
Will the halving trigger a rebound in Bitcoin’s price? Previous Bitcoin halvings in 2012, 2016 and 2020 resulted in Bitcoin rising sharply from the halving day price to its cycle top. Past performance is not a guarantee of future returns, of course, but history shows that each 4-year cycle has resulted in a bull run in the months after halving day.
This means that the upcoming halving day could be significant, but it’s important to note that halving is a technical event, which on its own shouldn’t have much effect on the price of Bitcoin right away, as the decrease in supply occurs over time after halving. However, with speculators at play, we could see some swings in Bitcoin’s price around the halving event.
There are two important points to keep in mind about Bitcoin cycles. First, historically, there has been a diminishing return after halving. The returns from halving day to the cycle top have fallen in each cycle – the price rose 93 times in the 2012 cycle, 30 times in the 2016 cycle and 8 times in the 2020 cycle. If this trend continues, Bitcoin’s price should multiply by something less than 8 times in the 2024 cycle, but that would still provide investors and traders with a handsome profit from the bull run.
The second point is that ahead of the new cycle, Bitcoin’s price has already climbed higher than the record price of the previous (2020) cycle. This has never happened before and which could complicate the already tricky task of trying to forecast Bitcoin’s direction in this new cycle.
Conclusion
Bitcoin halving is a technical yet important day as it starts a new 4-year cycle. The reward paid to Bitcoin miners is halved, which reduces supply over time and should boost the price of Bitcoin. This has happened in the previous Bitcoin cycles, which have all recorded bull runs. Traders should keep in mind that Bitcoin is a very volatile and risky asset.
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