There is just over a year left for one of the most anticipated events within the cryptocurrency ecosystem; the “halving” of Bitcoin. If we are guided by the chronology of these previous events in historical context, it would not be too early to start accumulating Satoshi. So let's better get ready for understand how this event works to be able to invest wisely.
What is the Bitcoin halving?
The Bitcoin halving is an event related to bitcoin mining. Miners create new bitcoins approximately every ten minutes, equivalent to the average time it takes to add a block of transactions to the blockchain. But before a block is added to the Bitcoin database, it is locked using a complex cryptographic puzzle. Miners compete to unlock it, using mining software to try to solve these puzzles with computing power. This process, better known as “proof of work,” is what keeps the network running. The first miner to solve the puzzle adds the block to the network and wins newly created bitcoins. Halving is one of the different features that stand out in the successful bitcoin design.
Validation of transaction blocks of the Bitcoin network. Source: Yevgeniy Brikman.
The first block of Bitcoin was mined on January 3, 2009, when Satoshi Nakomoto (anonymous creator of Bitcoin) coded the first block of transactions. In those days, the winning miner was rewarded 50 bitcoins per block, adding 50 new bitcoins to the total supply. After four years (in November 2012), the rewards were halved, to 25 bitcoins per block. They were then halved again in July 2016 to 12,5 bitcoins, and again in May 2020 to 6,25. This is expected to continue until the year 2140, when all 21 million bitcoins will have been mined.
Why is Bitcoin Halving so important?
Bitcoin has only been around for 14 years, but so far, each of these events has triggered a major bull market rally. And there are two reasons for this:
- Bitcoin is less inflationary every time it is halved. Analysts calculate the Bitcoin inflation rate based on the annual increase in the supply of bitcoins and divide it by the total number of bitcoins already in circulation. This puts the annual inflation rate of the king of the crypto ecosystem at around 1,8% currently, but will drop to above 0,8% when the halving happens in 2024. Therefore, as the supply of new bitcoins decreases , the law of supply and demand implies that the price should trend upward (other things being equal).
- The impact of halving on the price of bitcoin makes investors excited about the issue and, because they believe other investors are just as excited, everyone starts buying more or less at the same time, in anticipation of the next bullish rally driven for the halving.
How can the halving give us clues?
According to the page Nice Hash, the next Bitcoin halving is expected to begin in February 2024. That leaves us with about 64 weeks until the big day, which is interesting considering that these accumulation periods (yellow boxes) have been great times for accumulate bitcoin in the past. So if you think this will happen again, now is a good time to start accumulating bitcoins.
Bitcoin Halving Cycles. Source: Tradingview.
Of course, we must take into account two factors:
- Macroeconomic conditions are not the same as a decade ago. Bitcoin was born a year after the great crisis of 2008 and the Fed has spent more than 9 trillion dollars through bond purchasing programs and quantitative easing policies (that is, printing money out of thin air) since then until the past month of April 2022. Now, the Fed has been letting these assets leave their balance sheets as their maturity dates arrived. Of course, the Fed (and other central banks) could reapply such policies if the labor market situation worsens and the economy needs a boost to recover.
- 19,25 million bitcoins have already been created, equivalent to 91,67% of the 21 million planned. Therefore, every time the halving happens, the scarcity effect is smaller. In 2016, only 75% of the supply had been reached, but in 2020 that figure reached more than 85%. Additionally, each halving event (dotted line) the revaluation is reduced compared to the previous one. Therefore, although the next halving may be the catalyst for a new bullish rally for bitcoin, the percentage of price rise could be less than the previous one.
Circulating supply (yellow line) and BTC price (black line). Source: Glassnode.
In short, the next halving event in Bitcoin may generate lower returns than the previous bullish rally. But while it is true, the Bitcoin halving also benefits the entire cryptocurrency ecosystem, where we can see how Altcoins will revalue as in previous cycles. Ultimately, this event ends up causing a large entry of new investors into the cryptocurrency ecosystem, a fact proven during the Altcoin season (better known as “AltSeason”) that the market experienced during the beginning of 2021.