Bitcoin
Will Bitcoin Halving Trigger a Big Rally?
The fourth halving of Bitcoin has passed, setting the stage for a new era.
In the dynamic realm of cryptocurrencies, few events deserve as much attention and potential impact as Bitcoinin (Bitcoin -1.24%) halved. On April 19, Bitcoin underwent its fourth halving, marking a pivotal moment in its journey.
While past performance does not always predict future results, a closer look at the halving reveals Bitcoin’s resilience and its potential for significant price appreciation.
Image source: Getty Images.
What is half
Occurring approximately every four years, or 210,000 blocks added to the blockchain, halving reduces payments awarded to miners for resolving blocks, a process known as proof of work.
As this is the primary means for new Bitcoins to enter circulation, cutting miner rewards effectively reduces Bitcoin’s inflation rate. With the fourth halving now over, Bitcoin’s inflation rate is just 0.85%, making it less inflationary than gold. This process of reducing its inflation rate will continue until 2140, when the last Bitcoin is expected to be extracted, and supports its robust monetary policy, which gives priority to scarcity and finitude.
The effects of half
Because halvings have reduced Bitcoin’s inflation rate, they effectively change the dynamics around its supply and demand. As a result, even if demand remains constant, the price must increase to compensate for the reduction in supply. Essentially, halvings exert an upward appreciation in the price of Bitcoin.
We can see this by analyzing Bitcoin’s past performance after the halving. In years when a halving occurs, Bitcoin usually returns around 125% on average. If this trend continues, then that would put its price at $100,000 if measured from the beginning of 2024.
Even better, as the halving effect solidifies, it is in the years following the halving that the best gains typically emerge. In those years, Bitcoin grew almost 400% on average. If this halving follows a similar pattern, then Bitcoin could see its price reach somewhere around $500,000 in 2025.
Further exploration of the current landscape
While the halving alone could introduce profound impacts to the price of Bitcoin, there are some other developments that could make this halving unlike any other. Further exploration of the current scenario should help you see that these potential price targets are not as sensational as they may seem.
Firstly, it is crucial to understand that although the halving changes Bitcoin production, this halving is unique because there was an existing supply shock. For the first time, there were fewer coins available on exchanges during this halving than the previous one. Since peaking in May 2020, the total number of coins available on exchanges has plummeted. Standing today at around 2.2 million, these are the lowest levels observed since 2018.
Then we have the arrival of spot Bitcoin ETFs. In January, the Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs, effectively opening the doors for a new set of buyers to enter the Bitcoin market. For individuals unfamiliar with or without the technical knowledge required to navigate cryptocurrency exchanges, these ETFs provide a familiar, regulated path to gaining exposure to Bitcoin through traditional brokerages. Investors can now add Bitcoin exposure to their 401(k) plans or IRAs, effectively lowering the barriers to entry for a wider range of investors.
While it’s still early days, we can see how popular ETFs have been. To satisfy pent-up demand, by mid-February the 11 ETFs were collectively buying at a rate 10 times the daily Bitcoin production (around 900 Bitcoins). While the initial buying frenzy has cooled, if buying were to reach these levels again, it would mean that ETFs would be buying at 20 times the rate of daily production now that the halving has passed, putting even greater pressure on the price of Bitcoin.
Only time will tell how explosive this halving cycle will be for Bitcoin. But with a quick assessment of the implications that each halving brings, as well as other contributing factors such as an existing supply shock and the introduction of ETFs, there is reason for considerable optimism. Even with the price of Bitcoin hovering near $66,000 today as the effects of the halving materialize over the next few months, I’m still buying Bitcoin in anticipation of what’s to come.