Bitcoin
This week, the price soared to an all-time high, reaching more than $72,000. However, crypto bulls are hoping for further gains after the drastic reduction in new Bitcoin issuance in April, known as the “halving.”
Here's what investors need to know.
What is Bitcoin halving? When does it occur?
One of Bitcoin's more attractive features is that the supply of new tokens is programmed to increase at a predictable rate based on the underlying software code. Every time the Bitcoin “miners” processing transactions on the network win the computing race to verify blocks of transactions, new tokens are put into circulation.
The reward for each block is currently 6.25 Bitcoins, equivalent to approximately $441,000 at Bitcoin's recent price of $70,600. This is expected to drop to 3.125 Bitcoins when the next halving is expected to occur in mid-to-late April.
These events occur approximately every four years until Bitcoin in circulation reaches a software-defined token limit of 21 million. More than 19.6 million Bitcoins have been mined to date, and approximately 1.4 million have yet to be minted.
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How will the halving affect Bitcoin price?
Bitcoin has no fundamental value, only production costs, so its price depends entirely on supply and demand dynamics. Halvings tend to have a positive impact as they further restrict supply, and Bitcoin has a history of outperforming after previous halvings.
After the last halving in 2020, which followed the 2017 bull market, Bitcoin rose 33% in the next three months, more than 80% in six months, and more than 500% in the year after the halving. That's what it means. CoinLedger, a cryptocurrency tax company.
Current demand trends, supported by new exchange-traded funds (ETFs) issued by companies like BlackRock, are making bulls even more optimistic about the next halving.
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Fidelity Investments and ARK.
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“A decrease in the daily Bitcoin mining volume means something has to be sacrificed, and in this case, that means price.” Cryptocurrency-specific insurance said Zachary Townsend, CEO of the company, Meteen. “Given this trend, we expect Bitcoin’s all-time highs to be permanently surpassed.”
Not everyone is optimistic. Traders have long known that the April halving is near and are already pushing prices higher in anticipation. Bitcoin tends to outperform after halvings, but some analysts argue that it may already be priced in.
Nikolaos Panigirtzoglou, head of JPMorgan's analyst team, said: “We believe the Bitcoin halving event and its impact is predictable and well factored into the current Bitcoin price. “There is,” he said.
,
I wrote in my December memo.
But Bitcoin has long defied traditional analysis. In the same memo, the JPMorgan team said it was unable to pinpoint the price impact of the SEC's approval of spot Bitcoin ETFs. “If the SEC approves a spot Bitcoin ETF, we continue to see a strong likelihood of a rumor-buying/fact-selling effect,” Panigirtzoglou wrote at the time. Bitcoin prices have risen more than 50% since the SEC approved the first spot ETF on January 11th.
Bitcoin will ultimately move at the whims of investor demand. If demand continues to increase beyond April, through spot ETFs and platforms such as:
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Coinbase Global — The halving will ensure that the price continues to rise.
How will the halving affect Bitcoin mining stocks?
Another question is what the market share is for Bitcoin miners like Marathon Digital and Riot Platforms.
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Reacts to the next half-life.
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The mining business model is extremely energy intensive and sensitive to both energy and the price of Bitcoin. Crypto mining stocks plummeted as energy prices soared as digital assets entered a prolonged bear market following Russia's 2022 invasion of Ukraine.
Halving looks like a risk to miners. That's because your profits will essentially be cut in half. However, the impact could be mitigated if Bitcoin prices remain at record levels or rise further. The exchange rate between Bitcoin and traditional currencies such as the US dollar is important for miners who sell the tokens they mine or use them as collateral for debt to finance their operations.
Another factor is how much effort the mining computer has to put into validating each block of transactions. Bitcoin is built on the concept of “proof of work,” where miners compete to solve cryptographic puzzles to ensure that blocks of transactions are valid. The more miners compete, the more difficult the puzzles become and the more energy is consumed. Conversely, if the Bitcoin price falls and miners drop out, the difficulty level will decrease and energy costs will be eased.
Investors appear to view the halving as negative for miners. Miner stocks soared in 2023, then fell as the halving approached. Marathon and Riot are both down 27% over the past month, while Bitcoin is up over 40% over the same period.
“The Bitcoin halving will reduce the block rewards that miners receive for validating transactions.Unless the price of Bitcoin rises to offset the reduction in rewards, miners’ profitability is likely to decline. Yes,” analysts at market intelligence group CryptoQuant wrote in a note on Monday. “The stock price reflects this.”
Email Jack Denton at jack.denton@barrons.com.