Bitcoin, introduced in 2009, emerged as a decentralised financial system in response to the 2008 financial crisis, eliminating the need for central authorities or intermediaries. Its features mirror those of natural resources and precious metals, such as gold, with a finite supply of 21 million units. Unlike traditional currencies, Bitcoin’s value is designed to appreciate over time due to this predetermined supply limit.
The fourth iteration of the bitcoin halving occurred on 19 April, 2024. This technical milestone, amid heightened media attention on newly launched Bitcoin Spot ETFs in the US, is sparking debates. Some see the halving as a crucial event that will enhance Bitcoin’s value as a scarce asset in the years ahead, while others view it as a technical change hyped by speculators to boost its price.
But what exactly is it, and does it really matter?
What is halving?
The halving is a modification in bitcoin’s core blockchain technology aimed at reducing the pace of new bitcoin creation. Bitcoin, created by the pseudonymous Satoshi Nakamoto, was intended to have a capped supply of 21 million tokens. Nakamoto embedded the halving mechanism into Bitcoin’s code, which works by decreasing the rate of new bitcoin issuance. Currently, over 19 million tokens have been circulated.
When does it happen?
Halving occurs every time 210,000 blocks are added to the chain, approximately every four years. This built-in feature is designed to manage inflation. This event is inherent to Bitcoin’s design, serving as a means to regulate inflation. With approximately 19.5 million Bitcoins mined to date and a maximum supply fixed at 21 million, projections indicate that the last Bitcoins will be mined around 2140. Over the next 116 years, only 1.5 million Bitcoins are expected to be created, illustrating minimal remaining inflation from a technical perspective.
What happened at this halving?
Bitcoin traded flat in the immediate aftermath of the halving, holding steady around $63,000 and the rate of new bitcoin created roughly every 10 minutes reduced to 3.125.
Bitcoin halvings will continue to take place every 210,000 blocks until approximately 2140, at which point all 21 million coins will have been mined.
Impact on Bitcoin’s price in the medium-long term
Speculation abounds regarding its potential effects on Bitcoin’s market value, mining operations, profitability, and broader implications for the global crypto asset ecosystem. Let’s dive in to understand if it does have an impact.
Each reward reduction, aimed at preserving Bitcoin’s scarcity and value, poses challenges for miners’ profitability. They must contend with rising operational costs against diminishing rewards, suggesting that the market price must rise to sustain miners’ economic interest.
Vijay Valecha, Chief Investment Officer, Century Fianancial
There’s no evidence to suggest that previous halvings have caused bitcoin’s price to rise. Still, traders and miners have studied past halvings to try and gain an edge.
What happened the last time bitcoin halved?
Bitcoin experienced its last halving event on May 11, 2020, resulting in a 50 per cent reduction in mining rewards from 12.5 new bitcoin per block to 6.25 bitcoin. This reduction in supply created a bullish scenario, with the coin’s price climbing from $6877.62 on April 11 (one month before the halving) to $8821 at the time of the event. Despite notable volatility, the price continued to rise, reaching $64,000 in April 2021.
Similar patterns were observed during the previous halvings in 2012 and 2016. The strongest upward movement occurred after the halving event, and although there was a significant decline in value 12-17 months later, the price remained substantially higher than before the halving.
However, there were numerous explanations for Bitcoin’s sharp rally, and there is no conclusive evidence that the halving was the sole cause. In 2020, factors such as loose monetary policy and stay- at-home retail investors investing spare cash in cryptocurrencies also played a significant role in the surge.
What can we conclude from the above data?
Historically, Bitcoin’s halving events have led to increases in its market value, creating a bullish crypto market due to a decrease in new coin supply. The anticipated 50 per cent decrease in new Bitcoin supply post the 2024 halving event is expected to drive prices upward. However, attributing price variations solely to halving events is challenging due to Bitcoin’s complex market dynamics. While past halvings suggest a bullish effect, some argue the market might already anticipate this. Additionally, limited empirical data on past halvings (only three data points) makes predictions tricky.
Concerns arise regarding mining profitability post-halving, potentially leading to miners exiting and posing a security threat to the Bitcoin network. On the flip side, reduced mining rewards could benefit Bitcoin’s energy consumption and environmental footprint, encouraging energy-efficient techniques.
Despite potential drawbacks, Bitcoin’s scarcity remains a key driver of its value, attracting long-term investors. While some argue scarcity boosts Bitcoin’s value, others believe any impact is already factored into prices, complicating price prediction. Nevertheless, the expectation that the US Federal Reserve will take a dovish turn after the latest non-farm payrolls report might boost risk assets like Bitcoin in the near term.
Bitcoin is now increasingly viewed as a safeguard against traditional market instability, with traditional investment companies creating their own Bitcoin Spot ETFs to participate in this market.
In conclusion, the latest Bitcoin halving is expected to impact the entire crypto ecosystem, marking an important milestone beyond a mere technical event. It’s crucial for corporates and investors to stay informed about developments and consider potential implications. Additionally, the rise of Bitcoin Spot ETFs makes it easier to participate in this market, amid increasing media coverage and attention.
The writer is chief Investment officer, Century Financial
source: www.khaleejtimes.com
