Evening Brief – 04.16.24
The Fourth Halving
The first quarter was clearly a successful one for bitcoin. The Securities and Exchange Commission approved several U.S. bitcoin spot exchange-traded funds in January, attracting $30 billion in inflows over the first 40 days, the price of a bitcoin subsequently reached an all-time high in March, surpassing the previous record set in November 2021. The fourth Bitcoin halving, which is scheduled for later this month, is the next widely anticipated event.
Halvings have been historically positive for bitcoin’s price. The digital currency has “experienced significant gains both before and after past halvings, although the magnitude of these gains has been progressively lower for each halving,” Man Group wrote in its Views from the Floor – Upcoming Bitcoin Halving: A Reason to be Bullish?
The first halving in 2012 resulted in an unprecedented 943% increase in the six months after the event. However, successive halvings have shown more moderate returns, with the third halvings in 2020 resulting in an 83% increase in the following six months, despite a prior 1% decline, explained the London-based investment manager.
Bitcoin, “halving” refers to an event that occurs approximately every four years when the reward for mining new blocks is halved. This event is built into the Bitcoin protocol and is designed to control the supply of new bitcoins entering circulation, thereby influencing the overall supply and demand dynamics of the cryptocurrency.
The Bitcoin protocol specifies a fixed supply limit of 21 million bitcoins, a milestone likely to be reached around 2140. The halving events occur at predetermined intervals, specifically every 210,000 blocks. In the upcoming halving, miner rewards will decrease from 6.25 to 3.125 bitcoin per block. As a result, the total supply of bitcoins grows at a decreasing rate over time.
What can bitcoin investors expect for the fourth halving? The relationship between halvings and bitcoin’s price is not straightforward. Overall, the halving mechanism is a fundamental aspect of Bitcoin’s monetary policy, designed to promote scarcity, value preservation, and long-term sustainability, although the exact impact of halving events on price and market dynamics can vary.
“The price surge after the 2020 halving coincided with a period of significant fiscal stimulus and loose monetary policy in response to the Covid-19 crisis and therefore cannot simply be ascribed to the halving. Similarly, the recent price rally may have been influenced by factors such as the anticipation of spot bitcoin ETFs rather than the upcoming halving,” wrote Man Group.
Evaluating the potential impact of halving events on miners is crucial, as it directly affects their profitability and operational dynamics. Halving events result in a 50% reduction in the block rewards that miners receive for successfully mining new blocks.
This reduction directly impacts miners’ revenue streams, as they earn fewer bitcoins for their mining efforts. Consequently, miners must adapt their strategies to maintain profitability in the face of reduced rewards.
“The immediate market impact is likely to be limited since miners will be earning and consequently selling fewer bitcoins,” explained Man Group. “In the long term, miners may become more dependent on transaction fees as a source of revenue post-halving.”
Halvings are not the only factor influencing bitcoin’s price. It is also not guaranteed that the price behavior experienced prior to and following halvings will be duplicated.