What will the halving of Bitcoin mean?

The cryptocurrency Bitcoin has been filling the pages of the economic and financial media again in recent weeks and months. Earlier this year, the reason for the growing interest was the approval of new Bitcoin ETFs; in recent weeks, it is the expected halving again.

It was late last year that Bitcoin returned to an upward trajectory after a prolonged period of time, with investors anticipating the approval of Bitcoin ETFs by the US Securities and Exchange Commission (SEC). The price of Bitcoin thus settled permanently above $30,000 for the first time in quite some time, and although there was a correction following the ETF approval, the price shot to new all-time highs in the days and weeks that followed. Records were then broken by Bitcoin ETF trading volumes.

Halving BTC as a new price growth driver?

Another such event that could significantly shake up the price and send it to new highs (as everyone hopes today) is the so-called halving, which takes place about once every four years. The next one is expected to occur at the end of April this year.

The number of minable Bitcoins has been fixed at 21 million since its inception in 2009 (just over 19 million have been generated to date), and halving ensures that the rate of new Bitcoin growth gradually decreases. Thus, halving reduces the reward per block mined. Initially, the reward per block mined was set at 50 Bitcoins, reduced to 25 Bitcoins in November 2012, then to 12.5 Bitcoins in July 2016, and reduced to 6.25 Bitcoins in May 2020. Then in April this year, the reward per mined block will be reduced to 3.125 Bitcoin.

Halving doesn't happen exactly once every four years, but happens after 210,000 blocks have been mined, which then works out to about once every four years. So currently 900 Bitcoins are generated per day and after halving it will be 450 Bitcoins per day.

Halving is therefore not about reducing the total supply of Bitcoins, but about reducing the number of new Bitcoins that come to the market. Halving thus leads to an increase in the scarcity of Bitcoin, which should then logically lead to an increase in its price.

Given this expectation, and given the aforementioned introduction of Bitcoin ETFs, the price of Bitcoin is currently rising, which is logical on the face of it. Interest in the cryptocurrency is increasing, and its greater scarcity due to fewer new Bitcoins in circulation should thus lead to an increase in price. However, according to some economists, the rise, unlike past halving, is premature and too strong, and investors optimism and expectations may be overblown.

Bitcoin to $100,000?

Interestingly, and not just for Bitcoin, when the price gets into an uptrend, predictions of new all-time highs become much more prevalent (or at least get much more media coverage). Unfortunately, it is not uncommon that the more of these guaranteed reports of the Bitcoin price hitting $100,000 appear, the more likely it is that the price is more likely to fall. This happened again this March, when Bitcoin fell from its high of USD $73,800 to USD $60,000.

Of course, there is no reason to panic, as there can be a price drop before halving and something similar has happened in the past (and a correction has also occurred shortly after the halving itself). It may also be profit-taking by short-term speculators (holding Bitcoins for less than 155 days), who currently hold the most Bitcoins since the end of June 2021. Optimists may thus see a parallel in the fact that it was in late June 2021 that Bitcoin had a significant correction (from $64,700 to $29,200) and a strong uptrend ahead, after which the price reached a new high of $69,000 in November 2021.

It looks like a lot of factors are playing in favour of the price continuing to rise to new highs. On the other hand, historical performance is still no guarantee of future returns. According to analysts at J.P. Morgan, the Bitcoin price could fall to as low as USD 42,000 this year following a drop in halving expectations.

Will the black scenario come true?

According to J.P. Morgan, the black scenario is that a reduction in the reward for mining Bitcoins will make mining less attractive for many miners, because it is simply not worthwhile. But the miners themselves and their activity increase the security of the Bitcoin network. The point is that the more miners mine Bitcoin, the more computing power a potential attacker would need, so a large number of miners increases the security of Bitcoin. If too many miners quit mining due to inefficiency, this could reduce Bitcoins security. This could then lead to an increase in distrust, a decrease in investor interest, and a subsequent more significant drop in price.

In reality, however, the probability of this scenario may not be very high and may only have a temporary effect on the Bitcoin price. In the future, however, it may be an increasing problem, as the reward for the extracted block will be smaller with each additional halving. The solution may then be rising transaction fees, but again this may have a negative effect on the interest in owning and using Bitcoin.

What will actually happen after halving cannot be predicted with certainty today. If you have Bitcoin in your portfolio, you can expect it to rise to new highs, but you certainly can't count on it. If you are going to buy Bitcoin just in anticipation of further growth, we also recommend rather caution. Trade safely!