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What is the Bitcoin halving and how does it affect investors?

The cryptocurrency Bitcoin underwent a technological change at the end of April, with some traders speculating that the change could lead to a rise in the price of the world’s largest cryptocurrency. This change, known as the “halving,” slows down the rate at which Bitcoin miners can generate new coins.

Here’s how the Bitcoin halving will affect crypto prices and what investors need to know.

What is Bitcoin Halving?

Bitcoin is a cryptocurrency that exists only digitally, controlled by a series of networked computers that track, manage, and issue currency. This network verifies transactions using the currency and ensures the integrity of the system and ownership of the coins. New Bitcoins are issued when powerful computers called Bitcoin miners work on complex mathematical problems.

The rewards for solving these mathematical problems are predetermined and established at the beginning of the computer code that manages Bitcoin. Under this compensation plan, the compensation rate is halved every four years (so-called halving), such as in 2012, 2016, 2020, and 2024.

Therefore, as miners solve these complex problems, they receive fewer and fewer Bitcoins over time. This problem will not be resolved until the total circulation reaches his 21 million Bitcoins around 2140. According to CoinMarketCap.com, approximately 19.7 million Bitcoins have been issued so far.

In early 2024, a Bitcoin miner correctly solved the problem and added a block to the blockchain, for which he received 6.25 Bitcoins. After the April 2024 halving, you will only be able to earn 3,125 coins. This change will reduce payments to successful miners from about $400,000 to about $200,000.

This halving series will continue, and the amount of new coins issued will further decrease.

What does the Bitcoin halving mean for traders?

The slowdown in new Bitcoin issuance due to the halving highlights the fundamentally deflationary nature of cryptocurrencies. With a fixed production of only 21 million Bitcoins, including millions that may be lost forever, Bitcoin is deflationary. This means that the supply is relatively fixed in the short term, so as long as the demand for the cryptocurrency increases, the price in dollar terms can rise.

Short-term traders targeting the halving may find it particularly difficult as excitement about the event may have been priced into prices months in advance.

Markets are future-oriented and often anticipate events long before they appear in the financial press. For example, Bitcoin rose rapidly in the months leading up to the formal approval of Bitcoin ETFs in January. And the half-life is a long-known definition of an event.

The halving itself does not introduce any new information beyond what is already established in the Bitcoin code or adjust the rate of issuance of new Bitcoins. Since it is a “known known” it may have been factored into the price some time ago.

In the short term, prices can do anything, especially for assets that are driven entirely by sentiment. However, Bitcoin tends to rise or fall in response to changes in risk appetite, especially when driven by interest rates. Anything that awakens the “animal spirits” of traders and causes them to buy more Bitcoin, either directly or through Bitcoin ETFs, can drive up the price of Bitcoin.

Therefore, anyone predicting a target price for Bitcoin or any other purely speculative asset is just guessing. Because Bitcoin is not backed by something as fundamental as the underlying company’s cash flow, its price is ultimately determined only by fluctuations in sentiment and nothing else.

Therefore, more traders and capital must pour into the commodity for the price of Bitcoin to climb. Since selling it to someone who is more optimistic than you is the only way to make money, this is what investors refer to as the “greater fool theory of investing.” Legendary investors like Warren Buffett won’t touch Bitcoin or other cryptocurrencies because of this lack of a basic foundation.

A more interesting question is whether Bitcoin has long-term staying power. Although the coin’s deflationary and volatile nature makes it useless as a currency, it could still function as a long-term store of value if enough people decide they can hold onto it.

The answer to this question depends entirely on whether money continues to flow into cryptocurrencies. Given that the amount of Bitcoin issued is fixed, and that it will be increasingly difficult to mine new coins during this and subsequent halvings, an increase in the flow of funds into Bitcoin will push the price tends to rise.

In the long term, the main thing is to monitor how much money, especially institutional money, flows into Bitcoin and Bitcoin-related assets such as funds. From this perspective, a halving is not an event, although it may move the price of Bitcoin up or down in the short term.

Will Bitcoin’s halving affect the fundamental value of the virtual currency?

Unlike stocks, which are fractional ownership interests in businesses, bitcoin is not backed by the assets or cash flow of any underlying corporation. Therefore, by definition, Bitcoin is worthless. The sole people who keep the price of a cryptocurrency stable are traders and other investors who purchase the coin with the intention of reselling it to other investors at a profit, and so on.

Therefore, the Bitcoin halving will not affect the fundamental value of Bitcoin in the first place. Again, Bitcoin only has a price if traders believe it has value.

Of course, the halving will have some impact on the Bitcoin ecosystem. For example, low rewards to miners means that the price of Bitcoin has to rise over a long period of time in order for miners to continue mining profitably. While this may have little impact on the price of Bitcoin in the short term, it could encourage miners to reduce production, at least until the price rises to cover production costs.

That doesn’t mean the price of Bitcoin won’t increase due to the halving. The halving highlights a decline in Bitcoin’s issuance rate, which could attract more capital to the sector as traders anticipate a change in market sentiment and a rise in crypto prices. However, the main reason for this is an increase in funds flowing into the sector, rather than a fundamental change in the value of Bitcoin itself.

It’s important to emphasize that supply factors—such as an increase or decrease in the total number of coins—do not significantly influence cryptocurrency values. Cryptocurrency values are solely determined by demand. Cryptocurrency assets would be worthless no matter how plentiful or limited their issuance was if demand dried up over night.

Bottom line:

Anyone looking to trade the Bitcoin halving could end up moving in the wrong direction, as the market has priced in changes in sentiment well in advance. However, those who believe Bitcoin remains an attractive long-term investment should monitor continued inflows into Bitcoin while being aware of the significant risks associated with owning this asset.

Categories: Business
Priyanka Patil:

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