Preparing For The Next Halving
While traders await the price bump they believe will result from a drop in new supply, miners may be more wary.
Bitcoin has a number of different narratives driving the current bull market. ETF approval. A "flight to quality" in the face of high inflation, or "flight to safety" in the face of counterparty risk.
The Halving is another major development that drives trader's expectations, and that has historically coincided with significant price increases for bitcoin.
The Four-Year Cycle
Bitcoin was designed to be a fully decentralized online currency, addressing numerous flaws in fiat currencies. Its supply is algorithmically determined, rather than being set by a committee, and increases at a predefined rate that is hard-coded into the protocol. Block rewards are cut at each Halving, which happens every 210,000 blocks, or roughly four years. The first Halving, in 2012, saw rewards fall from 50 BTC to 25 BTC, then to 12.5 BTC in 2016, and to their current 6.25 BTC in 2020.
The upcoming Halving, expected around April 20, 2024, will reduce block rewards from 6.25 BTC to 3.125 BTC. At this point, only 450 BTC will be mined daily. With almost all bitcoins already mined, the currency's inflation rate will drop to 0.83%, making it a harder asset than dollars or even gold.
Traders and investors keenly await the Halving due to its historical impact on BTC prices. With demand steady but new supply halved, expectations are for a price increase. Previous Halvings, occurring midway through market cycles, correlated with significant price surges. Although this feature is an integral part of Bitcoin, it appears that many newer mainstream investors do not know about it.
Intuitively, the fall in new supply should be bullish. However, critics note that this event is transparently coded into the protocol. Therefore, there are arguments (notably by JPMorgan analysts) that the Halving is already priced in.
It's worth noting that this has not been the case in the past, as the Halving has coincided with a sharp increase in price.
Miners: A Different Story
For miners, who are paid with block rewards, the Halving represents a significant challenge. When new supply is cut, miners will have far less to share between them. Miners who operate at the margins, with less efficient hardware or higher electricity prices, will be pushed out of business. Essentially, the cost of producing a single BTC will double.
In the past, Halvings have led to a notable (if temporary) decline in hashrate, as a percentage of miners are forced to turn off their rigs. This typically leads to a consolidation of mining power among the larger and more efficient miners.
What To Expect
While the crypto community eagerly awaits the Halving, due to the expectation it will be a bullish catalyst, there is some skepticism among mainstream analysts that it will have any impact.
With the arrival of institutional money, the dynamics of the crypto markets are changing. For example, dips appear to have been bought more aggressively in recent months, meaning bitcoin has not (yet) experienced one of the 25-40% drawdowns that have occurred early in previous bull markets.
However, the reduction in supply is permanent, and will have an ongoing effect every single day. The relative lack of awareness makes it unlikely that the impact has been fully priced in, whatever the "expert" analysts think.
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