After reaching its last all-time high in November 2021, bitcoin then lost up to 70% of its value during the bear market that raged last year. The cryptocurrency has recovered in the past month, with a bullish trend. This was also observed on the rest of the market. As analysts ponder the reasons for the sudden rise, the answer may come from the upcoming bitcoin halving. The event, which will take place in 2024, is one of the most anticipated, due to its impact on bitcoin. It is therefore important to remember its implications on the Bitcoin ecosystem, and how it could affect the price of cryptocurrency.
What is the halving?
As a reward for their work on the blockchain, including validating transactions and creating new blocks, miners receive a certain amount of bitcoins. Every four years, it is reduced by half. This helps to control the issuance of bitcoins whose supply is fixed at 21 million: this is the halving. Thus, when bitcoin was created in 2008, the reward for network miners was 50 BTC.
This reward therefore increased to 25 BTC in 2012, then to 12.5 BTC in 2016. It was 6.25 BTC in 2020. Halving is an immutable process that exists in the code of the Bitcoin blockchain. It kicks in as soon as miners validate 210,000 new blocks. This mechanism thus makes it possible to ensure that the cryptocurrency will follow a regular emission rate until the release of the last bitcoin, which should occur after 32e halving.
Consequences for minors
In 2024, bitcoin will therefore experience the fourth halving in its history. This will increase the miner reward to 3.125 BTC. This reduction in subsidies will be accompanied by a redistribution of the cards in the mining sector. With half as many bitcoins up for grabs, competition will be tougher among miners. Some will also end up capitulating, due to a lack of profitability. The remaining miners will have to optimize their operating costs. A task that already promises to be difficult with the energy crisis that has been raging since the war in Ukraine.
The departure of unprofitable miners from the network is usually accompanied by a drop in hashrate due to the shutdown of their machines. It then follows an adjustment of the difficulty of the mining which makes it possible to stabilize the distribution of the rewards. This is then the moment chosen by new miners who storm the network to take advantage of the situation. The price of bitcoin then begins to climb gradually. This has the effect of increasing the attractiveness of bitcoin mining. In addition, it causes the return of old miners who are profitable again.
History of the impact of the halving on the price of bitcoin
The advent of the halving is historically associated with a rise in the price of bitcoin. A theory that is shared by the majority of analysts. Indeed, a reduction in the reward for miners implies a reduction in the supply of newly issued bitcoins on the market. Knowing that the supply of cryptocurrency is limited, investors then scramble to acquire them. This stimulates the rise in BTC prices. This trend has also been confirmed during the three previous halvings in the history of bitcoin.
Thus, after its first halving on November 28, 2012, bitcoin notably rose from 12 to 260 dollars. This, after five months. After the second halving on July 9, 2016, it took off to reach the $20,000 mark in December 2017. The last halving, which took place on May 11, 2020, was followed by a bull market punctuated by a peak at nearly $65,000 in April 2021.
What about the impact of the next halving?
Although the next bitcoin halving is for 2024, it may well be that it is already starting to impact the price of BTC. As a reminder, the cryptocurrency lost up to 70% of its value in 2022 to close the year at $16,547, according to data from CoinMarketCap. Against all expectations, bitcoin began a spectacular recovery last January to return above $22,000. The performance achieved (a monthly increase of 40%) is all the more impressive as it marks its best start to the year since 2013.
Just over a year from the fourth halving, bitcoin is already showing signs of ending the bear market. This weighed it down in 2022. Although other hypotheses are entirely possible, that of a breakthrough triggered in response to the approach of the fourth halving cannot be ruled out. The history of periods of volatility surrounding this important event proves this quite well. However, it is important to note that the current increase could also have been influenced by factors such as macroeconomic conditions.
What approach for investors?
While miners initially apprehend the advent of the halving, it is generally warmly welcomed among investors. The evolution of bitcoin prices as described above also justifies the latter’s approach. For investors, the halving therefore represents an opportunity to profit from the rise in prices that could follow the event. It is therefore not a surprise to see some investors accumulating more BTC as it approaches. They seek to realize a capital gain in the months that follow. However, such a halving approach presents several risks for investors.
Indeed, the halving is usually accompanied by a period of high volatility in the bitcoin market. The possibility of a fall in prices cannot therefore be ruled out for investors. This, even if previous halvings have led to bull markets. To this must be added the uncertainty linked to the macroeconomic conditions surrounding the halving which can disrupt the price of bitcoin. The crypto industry is also not immune to scandals and crises that could cause the collapse of the entire market as we have seen in 2022. All these reasons should encourage investors to remain cautious in their approach of the next halving.
The halving is therefore an event that is both important for the issue and the evolution of the price of bitcoin. Among miners and investors, we apprehend its advent in different ways. While the former fear the impact of the reduction in their reward following this event, the latter exult at the idea of taking advantage of an increase in the price of cryptocurrency. The historical trends in the price of bitcoin following previous halvings also argue in their favor. However, analysts suggest to the latest exercise caution and restraint as the next halving approaches, which should take place in April 2024.
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