The Bitcoin cryptocurrency underwent a technological change in late 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 produce new coins.
Here's how the Bitcoin halving could affect crypto prices and what investors need to know.
What is Bitcoin halving?
Bitcoin is a cryptocurrency that exists only digitally and is 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 high-powered computers called Bitcoin miners process complex mathematical problems.
The rewards for solving these math problems are predetermined and set into the computer code that governs Bitcoin when it is established. As part of that compensation schedule, the compensation rate is cut in half every four years (known as a halving), including in 2012, 2016, 2020, and 2024.
Therefore, as miners solve these complex problems, the amount of Bitcoin they receive will decrease over time until approximately in 2140, the total number of Bitcoins in circulation will reach 21 million. According to CoinMarketCap.com, approximately 19.7 million Bitcoins have been issued to date.
At the beginning of 2024, Bitcoin miners received 6.25 Bitcoins for correctly solving the problem and adding a block to the blockchain. After the April 2024 halving, you will only earn 3.125 coins. This change will reduce payments to successful miners from about $400,000 to about $200,000.
This series of halvings will continue, and the issuance of new coins will further decline.
What does 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 circulation of just 21 million coins, including millions thought to have been lost forever, Bitcoin is deflationary. This means that the supply is relatively fixed in the short term, so as long as the demand for a cryptocurrency increases, its price in dollar terms will tend to rise.
Short-term traders aiming for halving may find it particularly difficult. That's because excitement about the event may already be priced in months in advance.
Markets are forward-looking and often anticipate events long before they appear in the financial press. For example, Bitcoin soared in the months leading up to the official approval of Bitcoin ETFs in January. And halving is a long-known definition of an event.
The halving itself does not introduce any new information beyond what is already established in Bitcoin's code or adjust the rate of new Bitcoin issuance. It's “well known” so it may have been factored into the price a while 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 increases the “animal spirits” of traders and causes them to buy more Bitcoin, either directly or via Bitcoin ETFs, tends to push up the price of Bitcoin.
Therefore, anyone predicting a target price for Bitcoin or any other purely speculative asset is just making a guess. Because Bitcoin is not backed by something as fundamental as the cash flow of the underlying business, its price is ultimately determined solely by changes in sentiment.
Therefore, for the price of Bitcoin to rise, more traders and more funds need to flow into Bitcoin assets. This is what investors call the “Fool's Theory of Investing”: the only way to make money is to sell it to someone more optimistic than you. This fundamental lack of backing is why legendary investors like Warren Buffett stay away from Bitcoin and other cryptocurrencies.
A more interesting question is whether Bitcoin has long-term staying power. Due to its deflationary and unstable nature, the coin cannot be used as currency, but it can still serve as a long-term store of value if enough people decide that it can maintain its value.
The answer to this question depends solely on whether funds continue to flow into cryptocurrencies. Given that the amount of Bitcoin issued is fixed, and that new coins are harder to mine as part of the halving after this halving, as more funds flow into Bitcoin, the price will rise. There is a tendency to.
The important thing to watch over the long term is how much money, especially institutional money, flows into Bitcoin and Bitcoin-related assets such as funds. From this perspective, a halving is not an unusual event, but it can move Bitcoin's price up or down in the short term.
Will Bitcoin Halving Affect the Fundamental Value of the Cryptocurrency?
Unlike stocks, which are fractional ownership interests in a company, Bitcoins are not backed by the assets or cash flow of the underlying entity. Therefore, Bitcoin by its nature has no fundamental value. Its price is only supported by traders and other traders who buy the cryptocurrency in the hope of selling it to other traders, who also hope to sell it further to other traders for profit etc. is.
Therefore, Bitcoin's halving cannot affect its fundamental value, since Bitcoin has nothing to begin with. Again, the only way Bitcoin has a price is if traders decide it has some value.
Of course, the halving will have some impact on the Bitcoin ecosystem. For example, decreasing rewards to miners means that the price of Bitcoin will have to rise over a longer period of time for miners to continue mining profitably. In the short term, it may have little effect on the price of Bitcoin, but it may prompt miners to produce less, at least until the price rises to meet production costs.
This does not mean that the price of Bitcoin will not increase due to the halving. The halving could highlight a decline in Bitcoin issuance rates, attracting more capital to the sector as traders anticipate changes in market sentiment and hope for crypto prices to rise. There is sex. However, the main driver is the movement of more funds into the sector, not a fundamental change in the value of Bitcoin itself.
It is worth reiterating that supply issues, e.g. more or less total coin volume, are not the main factor in cryptocurrency prices. Demand is the only factor that determines the price of a cryptocurrency. If demand dries up overnight, crypto assets will become worthless, no matter how abundant or limited the amount of issuance is.
conclusion
Those looking to trade the Bitcoin halving may find themselves doing the wrong thing, as the market may have priced in a change in sentiment well in advance. However, those who think Bitcoin remains an attractive long-term investment should keep an eye on continued inflows into Bitcoin while understanding the significant risks of owning it.
Editorial Disclaimer: All investors are encouraged to conduct their own independent research on any investment strategy before making any investment decisions. Additionally, investors should note that past performance of an investment product does not guarantee future price appreciation.
