Despite the ongoing trial of the failed FTX exchange’s founder Sam Bankman-Fried in New York reminding the world of the problems faced by the crypto sector, many market participants believe now is the perfect time to buy Bitcoin.
The value of the original cryptocurrency, Bitcoin still accounts for around 50% of the entire crypto sector, is still just around $28.2k compared to over $67k in late 2021. The past six months have also been a period of price volatility but little new ground gained by the grandaddy of cryptocurrencies, following a period of strong gains in early 2023.
But even if the general perception is that the “crypto winter” that has gripped the sector since financial markets lowered exposure to riskier asset classes in late 2021 is ongoing, optimism around Bitcoin’s nearer term prospects abounds in some quarters.
Will Bitcoin start on a new four-year cycle because of “halving” due in April 2024?
There is a popular school of thought among Bitcoin proponents, traders and analysts that Bitcoin and wider crypto market moves in relatively predictable four-year cycles.
And these cycles have demonstrated historical consistency because they are heavily influenced by the periodical “halving” of the Bitcoin reward paid out to “miners” – the term given to those that lend their computing power to the functioning of the blockchain technology it runs on.
Processing Bitcoin transactions securely requires the solving of cryptographic problems. The activity of “mining” the cryptocurrency, and others, is the lending of computing power needed to solve those problems to the P2P blockchain network that powers Bitcoin. It’s essentially a competition for whose processors solve the problem first – a competition economically incentivised by the reward of newly released, or mined, Bitcoin made to whoever is behind the successful mining operation.
One of the central principles of Bitcoin is that, unlike fiat currencies, it should be immune to inflation caused by an increase in the supply, especially one brought about by centralised decision making, such as by a central bank.
A core mechanism to achieving that is the overall cap of 21 million bitcoins that will ever be released. To keep the supply of new coins consistent until all 21 million have been minted, the reward for mining a Bitcoin blockchain block halves every 21,000 blocks. As of August 2023, 19.4 million bitcoins had already been minted, or about 92% of the total 21 million.
The “halving” of the Bitcoin block reward paid out to miners takes place roughly every 4 years with the most recent, and third overall, taking place in May 2020. The block reward started at 50 Bitcoin in 2009 and was reduced to 6.25 in 2020.
The next halving will see the block reward drop to 1.125 Bitcoin and is expected to take place sometime around April 2024.
Why are Bitcoin’s “halving” events associated with the start of a new bull market?
When a halving occurs, the rate of new Bitcoin supply entering the market drops. Assuming demand remains constant, that sees overall demand rise in relation to supply – the knock-on effect of that is a rise in the price of Bitcoin as more would-be owners chase relatively fewer coins.
Historically, there has been a strong level of correlation between halving events and Bitcoin bull markets. The Bitcoin block reward halved for the first time in November 2012 when a single Bitcoin was worth about $12. A year later its price had increased 9,921% to $1,238. However, withing three months it had plunged back 91% to $112.
The block reward halved for the second time in July 2016 with Bitcoin worth about £652. By the end of 2017, 17 months later, its value had increased by 2868% to $19,345 – a new record high. Again, that peak was followed by a slump, 83% this time, to $3233.
The most recent halving in May 2020 saw Bitcoin’s dollar exchange value grow 688% to $67,549 in November 2021 – still the record high. By last November Bitcoin was trading 77% down at $15,760.
After a strong run early this year, Bitcoin has been trapped below $30,000 since and currently trades at $28,595.
But if the historical post-halving trend repeats, Bitcoin’s value will leap next year. As the cryptocurrency’s market capitalisation has grown, its been worth much more at each subsequent halving than it was at the previous, the price rise and fall that has followed has been less extreme. That can be explained by Bitcoin generally gradually becoming less volatile over the years because it takes larger swings in demand and supply to provoke big price movements.
But with gains approaching 700% between the last halving and the new historical high that followed it, even the prospect of a more modest leap of a few hundred percent has dollar signs blinking in the eyes of many crypto trading enthusiasts and holders of Bitcoin. As well as holders and traders of other cryptocurrencies – the wider market tends to follow Bitcoin’s lead.
Why post-halving Bitcoin bull markets might be more correlation than causation and not happen this time
However, not everyone is convinced. An important point to note is that there have only ever been three Bitcoin block reward halvings until now. An historical record of three events spaced out over 8 years is a dangerous pattern to accept as locked in and almost guaranteed to repeat.
It could be largely coincidence that such strong Bitcoin bull markets have occurred after the three halvings to take place so far.
One strong argument, especially in the context of a more mature Bitcoin market than that of 2020, is that it is no secret that the next halving will take place sometime around next April – which should mean the market prices that in long before it happens. The current value of Bitcoin should already be pricing in a halving expected in about 6 months.
It’s also important to note that while the new supply of Bitcoin entering the market will be halved, the overall volume of the cryptocurrency in circulation remains. So unless there is also some growth in demand there wouldn’t be a significant impact on price.
Macroeconomic conditions are also changed. The Covid pandemic struck in early 2021, not long after the previous halving, and resulted in markets being flooded with liquidity as central banks strove to keep economies afloat. That led to a surge in valuations across riskier asset classes including higher interest bonds and growth stocks – as well as cryptocurrencies.
Cryptocurrencies further benefitted from the unique conditions of Covid that kept people at home and online far more than normal, stoking interest in the sector among a population with money to spend that would normally have gone on other things. Online trading boomed and cryptos were particularly popular with a new generation of young investors/speculators.
2012 and 2016 halvings also coincided with more widely bullish conditions for financial markets pepped up by historically low interest rates often close to zero and central banks pumping cash into the system.
Things are very different now after a period of the highest inflation in decades and much higher interest rates.
There are also still plenty of concerns around the long-term sustainability of Bitcoin and whether it will retain its position as the market-leading cryptocurrency – or if it could potentially be supplanted by a new, more technically mature alternative. Or pushed to the margins of the economy by regulators – the SEC is taking an extremely conservative approach to cryptocurrencies in the USA.
Bitcoin’s 2024 halving doesn’t guarantee returns on today’s prices
For many, the historical trend of Bitcoin’s price after the three previous halving events will fuel optimism of a repeat next year. But caution should also be urged.
Macro economic conditions are very different to those of 2012-2022. And there’s only been three so far – it’s a very limited data set to make big bets on.
But with all 21 million bitcoins almost in circulation and 2024 set to be the last halving before crypto mining moves to a new model, the fourth and final division of the block reward is also the last chance for traders to take advantage. The FOMO that could result in could be enough to drive price increases.
Or economic strains could mean attention is focused elsewhere and this time around there is no surging bull run for Bitcoin. We’ve got another 6 months to wait to find out.