The cryptocurrency community is currently looking forward to the fourth bitcoin halving expected in mid-April. Investors are evaluating the possible impact on the market. Bitcoin has already seen a significant rally this year, gaining 56% due to the approval of exchange-traded funds that directly invest in bitcoin by the Securities and Exchange Commission in early January. Traders are also anticipating the halving event which will decrease the future supply of bitcoin in the market.
Bitcoin halving happens approximately every four years. It results in the miners’ reward being halved following the approval of new blocks added to the blockchain. This halving will decrease the rate of new bitcoin entering the system as the total quantity of mined bitcoin gets closer to the maximum threshold of 21 million circulating units. Bitcoin’s creator, Satoshi Nakamoto, established this limit to prevent the arbitrary issuance of new tokens from devaluing the currency. Halving is thus viewed as a tool to control inflation.
The process of creating new blocks on the blockchain, which requires energy-intensive computers, is expensive. By reducing the reward for this process, the incentive to produce new bitcoins is theoretically reduced. Miners may also be driven to use better mining machines that consume less power but have higher computing ability.
Historically, halving events have led to supply shocks that have sparked increased interest and speculation within the crypto community. Research by crypto tax consultancy CoinLedger shows that in the six months following the last two halvings, the value of BTC increased by 51% and 83%, respectively.
However, the current market dynamics are unique in the history of cryptocurrency, prompting a reassessment of the potential impacts of the halving.
Researchers have noted that the halving effect has gradually diminished over time, with each halving leading to a decrease in growth rates in the value of bitcoin. The authors of the study also suggest that the entry of institutional players is changing the overall habits of bitcoin investors. Long-term holders are becoming increasingly important, and the amount of bitcoin held on exchanges is at a five-year low.
The authors wrote, “If this trend were to persist, bitcoin’s supply would become increasingly illiquid, setting the stage for a supply squeeze and consequently a potential sharp rise in price.”
With the introduction of cryptocurrency exchange-traded products and the involvement of institutional players, the current supply and demand dynamics are very different from those of the past. Although halving will certainly have some effect on bitcoin’s value and publicly-traded miners’ stocks, it will not have any direct consequences for ETF holders.
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