What Everyday Investors Need to Know About a ‘Bitcoin Halving’

As we head towards mid-April, the investment world is abuzz with speculation and hype around the upcoming ‘Bitcoin halving.’ But what is a Bitcoin halving, and why is it so significant in terms of price? More pointedly, should we place our faith in predictions about the current Bitcoin halving, leading to a bull run? And if prices do inflate, will they stay there?

TLDR: If the ‘Bitcoin halving’ and the crypto market has a relationship status, it would probably be: ‘It’s complicated…’!

Quick recap - what is a Bitcoin halving event?

Bitcoin operates using a technology known as blockchain (a secure digital ledger) that records transactions across a network of decentralized computers spread around the globe, ensuring transparency and immutability. Unlike traditional currencies, where new money can be printed by central banks and governments, the supply of Bitcoin is limited, and there will only ever be 21 million Bitcoins in existence, making it a deflationary digital currency.

To understand the halving, let’s do a quick overview of a few key terms:

• A block is simply a batch of transactions - i.e., payments between people - that are bundled together and added to the list of previous blocks, making a blockchain!
• A blockchain miner is a participant in the network who uses computational power to validate and add these blocks (batches of transactions) to the blockchain.
• A block reward is the amount of new Bitcoin given to a blockchain miner for adding a new block to the chain.

A Bitcoin halving is an in-built, pre-programmed event that takes place every 210,000 blocks or roughly every four years.

During a halving event, the block reward is cut in half. Currently, mining a new block gets you a reward of 6.25 Bitcoin, and after halving, the reward drops to 3.125 Bitcoin. As more people adopt Bitcoin and demand rises, the halving ensures that supply growth slows down, creating an environment reminiscent of precious metals like gold.

A halving event’s influence on price

A fixed supply of 21 million Bitcoins means that, over time, these become increasingly scarce. Based on past experience, it is believed that the halving will have a profound economic impact on Bitcoin's ecosystem. With the reduction in block rewards, the flow of newly mined Bitcoins decreases, leading to a decrease in selling pressure from miners.

In the past, halvings have been followed by periods of increased demand and price surges due to the dynamics of supply and demand. It is this history of post-halving price increases that has fueled the excitement and anticipation surrounding each event.

It’s not that simple…

However, while some analysts anticipate an upward trend (which has been the case historically post-halving), the reality is much more nuanced.

These events spark widespread excitement but have also been followed by periods of consolidation and correction. Market dynamics, sentiment, and regulatory factors all influence Bitcoin's price trajectory, making a straight-line ‘ascent’ unlikely.

Understanding the broader context

The halving of Bitcoin block rewards is foundational to Bitcoin’s well-known four-year cycle, which is often referred to as the ‘halving cycle’. This cycle has been historically closely linked to price, with the cycle progressing through ‘Bull’ (rising prices); ‘Bear’ (falling prices); ‘Accumulation’ (a levelling out of prices) and ‘Expansion’ (steady growth).

Importantly, it’s rarely smooth sailing within each of these phases, and there might be rallies, reactions, and a lot of volatility on (hopefully) the way up.

(Chart depicting Bitcoin’s entire price history.)

Many analysts have also raised the possibility of a ‘Super Cycle’ off the back of theBitcoin ETFs being approved recently. These have led to an injection of investment in the industry over the last 3-4 months, setting out an unprecedented landscape in terms of all prior cycles. We have had several huge all-time highs (ATHs) hitting the market ahead of this halving and a number of new everyday investors with an interest in crypto as part of their investment portfolio. What this will do to the typical variance in price post-halving is still unknown.

Staying calm

Given the crypto market’s volatility, strategies that seasoned investors often employ include:

• Dollar-cost averaging (DCA): Regularly invest fixed amounts regardless of market conditions to average out costs and reduce risk.

• The hold-on-for-dear-life (HODL) strategy: Hold onto assets long-term despite market fluctuations, focusing on fundamentals rather than short-term movements.

• Diversification: Spread investments across different assets (such as types of coins) to minimize risk from volatile market swings.

  
  

It’s important that Bitcoin investors understand the basic essence of this market cycle, together with Bitcoin's long-term value proposition. This will empower them to ‘stay calm’ and not run aground (such as ‘panic selling’ prematurely) when the market hits rough seas. Only then will they be able to confidently navigate volatility and tap into its potential for the future.