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Jason Welz, Head of Digital Assets at Jaltech
As Bitcoin continues to mature and establish itself as a major player in the global financial landscape (with the approval in January of 10 US-based Bitcoin ETFs, the latest endorsement of the traditional financial industry), the investment community now has turned its attention to the next catalyst: Bitcoin Calendar: a fifty percent reduction in the Bitcoin inflation rate, known as Halving, scheduled for April.
Scheduled to occur approximately every four years, the Halving represents a pivotal moment in Bitcoin's journey. In this article we delve into the concept of Bitcoin Halving, its historical importance, and the potential impact it could have on the crypto market in 2024.
What is Bitcoin Halving?
Bitcoin Halving is a predetermined event built into the cryptocurrency code, designed to occur approximately every 210,000 blocks, which is approximately every four years. This event results in a 50% reduction in the reward Bitcoin miners receive for validating transactions and securing the network. In essence, Halving slows the rate at which new bitcoins are created, ultimately limiting the total supply to 21 million coins by 2140. This programmable scarcity is fundamental to the design of Bitcoin and results in parallels being drawn with precious metals such as gold.
Expected to arrive in mid-April 2024, Bitcoin's fourth Halving will see the block reward, paid to miners for their contribution to maintaining the network, drop from 6.25 BTC to 3.125 BTC.
Historical precedent
Bitcoin's three previous Halvings in 2012, 2016, and 2020 provide valuable insight into what we may see in 2024. Historically, a very similar price pattern developed around each Halving. Firstly, in the months leading up to Halving, a relatively mild upward trend is established. After the Halving, we see this bullish trend accelerate, with Bitcoin prices reaching new all-time highs before two years pass.
Subsequently, we have always seen a strong bearish trend emerge; This bearish trend always ends when prices approach the previous cycle's all-time highs.
So far, the next Halving does not appear to be different from previous cycles. We have had a strong bearish trend during 2022 following the all-time highs of 2021. In 2023 a firm bullish trend was established. Now, if the cycle repeats itself, we could expect a parabolic rise to begin in April.
While we have seen rallies following each halving to date, we have also seen the returns generated by these rallies decline each cycle. In dollar terms, Bitcoin rose 10,300% after the 2012 Halving. 2020 saw a more modest 730% increase, and many expect 2024 to show an even smaller increase. This makes some sense, as each subsequent halving takes place in the context of a higher overall supply of Bitcoin, meaning that the impact of the halving on the inflation rate is becoming smaller.
Historically, halvings have seen strong, albeit declining, price multiples.
While historical precedents suggest a positive correlation between halvings and price increases, predicting the exact trajectory remains a complex task. Some experts maintain that the market has already discounted prices in anticipation of the 2024 Halving, potentially mitigating the immediate impact on prices. This argument was also heard in crypto circles around previous halvings.
Proponents of the importance of Halving point to the long-term effects on Bitcoin's scarcity, arguing that reducing supply will inevitably cause prices to rise.
ETF Impact
US-based ETFs launched in January have easily exceeded flow expectations. Capital inflows during the first six weeks completely eclipsed capital inflows into the first gold ETFs during 2003.
This suggests that these financial products have been able to unlock a significant amount of pent-up demand for Bitcoin from investors (both retail and institutional) who previously did not want to manage the complexities of custody of their own cryptocurrency investments.
This provides bulls with an explanation as to why a potential post-Halving rally might not lead to a drop in the growth multiple this time.
Mining Dynamics
For investments in publicly traded Bitcoin mining companies, a post-Halving rally may not be as positive a development as it appears at first glance.
With reduced block rewards, miners must contend with lower profit margins if prices cannot double to make up for the fifty percent drop in rewards. This could potentially lead to greater competition and consolidation within the mining sector. Miners operating on outdated hardware may find it economically unviable to continue, further centralizing mining power among larger, more efficient operations. This change could, in turn, raise questions about the network's reliability and its ability to remain censorship-resistant, two key pillars of Bitcoin's value.
The broader cryptocurrency market
While Bitcoin attracts much of the public's attention, Bitcoin itself has underperformed the broader crypto market in the wake of the two previous Halvings. This suggests that those with a strong conviction about the Halving's positive impact on price might be better off diversifying their investment across the entire cryptocurrency ecosystem, rather than simply investing in Bitcoin.
Conclusion
While historical trends suggest a positive correlation between halvings and price rallies, the complexities of market dynamics make accurate predictions difficult. Investors and enthusiasts alike will be closely monitoring the months following the Halving, eager to witness the impact on the price of Bitcoin, the mining ecosystem, and broader market sentiment.
As the crypto community prepares for this supply shock, one thing remains certain: Bitcoin Halving 2024 will undoubtedly be a defining moment in the continued evolution of the world's leading cryptocurrency.
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