The cryptocurrency Bitcoin is undergoing a technical change in late April, and some traders are speculating that the change could help boost the price of the world’s largest cryptocurrency. This change is known as a ‘halving’ and reduces the rate at which Bitcoin miners can produce new coins.
Here’s how Bitcoin’s halving could impact the crypto’s price and what investors need to know.
What is a Bitcoin Halving?
Bitcoin is a cryptocurrency that exists only digitally and is managed by a series of networked computers that track, manage and issue the 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, process complex mathematical problems.
The reward for solving these mathematical problems is predetermined and recorded in the computer code that controlled Bitcoin when it was created. As part of that pay schedule, the pay rate is halved every four years – called a halving – with events happening in 2012, 2016, 2020, 2024 and so on.
So miners receive fewer and fewer Bitcoins over time as they solve these complex problems, until Bitcoin’s total issuance of 21 million coins is reached, around the year 2140. So far, according to CoinMarketCap.com, there have been about 19.7 million bitcoins issued.
In early 2024, Bitcoin miners received 6.25 bitcoins for correctly solving a problem and adding a block to the blockchain. After the halving in April 2024, they will only earn 3,125 coins. This change reduces the payout to successful miners from about $400,000 to about $200,000.
This series of halvings will continue in the future, further reducing the issuance of new coins.
What does a Bitcoin halving mean for traders?
The slowing issuance of new bitcoins through a halving emphasizes the fundamentally deflationary nature of the cryptocurrency. With a fixed issue of just 21 million coins – including millions believed to be lost forever – Bitcoin is deflationary. That is, because the supply is relatively fixed in the short term, the price in dollars is likely to rise as long as demand for the crypto rises.
Short-term traders looking to play the halving may find this particularly tricky, as excitement about the event may have already been factored into the price – even months ago.
Markets are forward-looking and often anticipate developments long before they appear in the financial press. For example, in the months leading up to the official approval of Bitcoin ETFs in January, Bitcoin soared. And the halving is the definition of an event that has been known for a long time.
The halving itself does not introduce any new information or alter the issuance rate of new Bitcoins in any way other than what is already written into the Bitcoin code. It is a “known known” and may therefore have been included in the price some time ago.
In the short term – and especially with an asset driven entirely by sentiment – price can do anything. However, Bitcoin tends to rise and fall due to changes in risk appetite, especially if this is determined by interest rates. Anything that stirs up the “animal spirit” of traders and causes them to buy more Bitcoins directly or through Bitcoin ETFs also tends to undermine the price of Bitcoin.
So anyone predicting a price target for Bitcoin or any other purely speculative asset is just gambling. Because Bitcoin isn’t backed by anything fundamental like an underlying company’s cash flow, its price is ultimately determined only by changes in sentiment – nothing else.
So for Bitcoin’s price to rise, more traders and more money need to flow into the asset. That’s what investors call the “greater fool theory of investing,” since the only way to make money is to sell it to someone who is more optimistic than you. This lack of fundamental support is why legendary investors like Warren Buffett don’t want to touch Bitcoin or other cryptocurrencies.
A more interesting question is whether Bitcoin has staying power in the long term. Although the currency’s deflationary and volatile nature makes it useless as a means of payment, it may still function as a long-term store of value if enough people decide it can hold its value.
The answer to this question depends solely on whether money continues to flow into crypto. Given Bitcoin’s fixed issuance – and the increasing difficulty of mining new coins as part of this halving and subsequent halvings – any increase in the flow of money into Bitcoin will increase its price.
The most important thing to watch in the long term is how much money – especially how much institutional money – flows into Bitcoin and Bitcoin-related assets like funds. From this perspective, the halving is a non-event, although Bitcoin’s price could move higher or lower in the short term.
Does a Bitcoin halving affect the fundamental value of the crypto?
Bitcoin is not backed by the assets or cash flow of an underlying entity, unlike stocks, which are a fractional ownership stake in a company. Bitcoin therefore naturally has no fundamental value. Its price is only supported by traders and others who buy the cryptocurrency in the hope of selling it to other traders, who also hope to sell it for a profit to still other traders, and so on.
So a Bitcoin halving cannot affect Bitcoin’s fundamental value because it has no value to begin with. Again, the only way Bitcoin has a price is because traders decide it is worth something.
Of course, the halving will have some effects on the Bitcoin ecosystem. For example, the lower pay for miners means that the price of Bitcoin will have to rise over a longer period of time before miners can continue mining profitably. That may do little for Bitcoin’s price in the short term, but it could push miners to produce less until the price rises to at least meet their production costs.
That’s not to say that a halving won’t increase the price of Bitcoin. A halving could highlight Bitcoin’s declining issuance rate, drawing more money into the sector as traders anticipate a change in market sentiment and expect a rise in the crypto’s price. But the main driver is more money flowing into the sector, not a fundamental change in the value of Bitcoin itself.
It’s worth repeating that supply issues – more or less total coins, for example – are not the main driving force behind crypto prices. Demand is the sole ultimate driver of crypto prices. If demand dried up overnight, crypto assets would be worthless, no matter how abundant or limited their issuance.
In short
Those looking to trade the Bitcoin halving may find themselves on the wrong side of a move, as the market has already priced in potential changes in sentiment well in advance. However, those who believe Bitcoin remains an attractive long-term investment should monitor continued flows into the asset while understanding the significant risks that come with owning it.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
