One year before Bitcoin’s fourth halving – Will it affect its price?
Just one year is left before Bitcoin goes through its fourth halving, and industry experts and investors are closely monitoring how it could impact the overall crypto market and Bitcoin’s value.
One of the hottest subjects raging in the crypto environment is the next Bitcoin halving, the fourth in the digital currency’s history. It will be an event as important as Ethereum’s Merge and will definitely impact Bitcoin’s price, but also the network’s economics because it reduces the rate of coins supply and consequently the miners’ rewards. But how does halving work? What consequences should we expect to witness in the blockchain? Will the event impact the price trajectory of the coin?
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What is Bitcoin halving?
Since Satoshi Nakamoto published Bitcoin’s White Paper, everyone knew that the coin’s fundamental mechanism is the halving. The digital currency was created to cut its mining reward by half every 210,000 blocks, which happens approximately every 4 years. These events have several goals, to control the coin’s inflation rate, transform it into a scarce asset like precious metals, and ensure a predictable supply of new coins available on the market.
The halving aims to provide a deflationary ecosystem for Bitcoin, gradually reducing the number of coins introduced in circulation. The token’s scarcity is supposed to preserve Bitcoin’s value in the long run and transform it into a desired store of value. The halving mechanism is an essential component of the oldest coin because it provides economic sustainability in the long term. We should not forget that the maximum supply of Bitcoin is 21 million coins, and halving events are crucial in achieving this goal.
Historically, the previous three halving events affected Bitcoin’s price by reducing the supply of new coins. The cryptocurrency registered substantial increases in the months following the halvings because investors anticipated a supply shock and increased demand for the digital asset.
At present, miners receive 6.25 BTC per block, but after the next halving event, which is predicted to occur in 2024, their reward will drop to 3.125 BTC per block. The cut will limit the number of new coins entering the market and Bitcoins available in the market, which could drive the price up because the demand usually increases when the supply decreases.
However, it’s essential to note that nothing can guarantee that Bitcoin’s past performance will repeat. A series of factors like regulatory developments, market sentiment, and macroeconomic trends also affect cryptocurrencies’ value, and Bitcoin is also subjected to them.
Therefore, crypto investors should approach the upcoming halving cautiously and develop a strategy to protect their portfolios. It’s essential to consider the factors that impact the crypto landscape, but also the historical significance of halving events.
A controlled supply is essential for Bitcoin blockchain’s dynamics
One characteristic that makes Bitcoin unique in the sector is its predictable, fixed, stable, and controlled supply. It’s the one feature that made financial experts compare Bitcoin to gold because the asset is as scarce as precious metals. A new block is validated around every 10 minutes, and because everyone knows how many new coins will be created, it’s easier to estimate how many Bitcoins are on the market at any given moment in time. Bitcoin’s protocol includes all these rules, and changing them is impossible.
As mentioned earlier, there have been three halving events until now, and it’s best to look at what happened then to predict possible scenarios for the coming event. Around every four years or every 210,000 blocks, the reward for minting new coins is cut in half, and it’s a crucial step in leading to the final 21 million bitcoins that could be in circulation.
If we analyse the event from a supply-demand perspective, restricting the supply rate periodically should support the price; suppose the demand for Bitcoin doesn’t decline dramatically. Even if the market has been in a bear phase over the last few months, buyers have been absorbing more new Bitcoins monthly, and the price fluctuated significantly.
How does the halving event from 2024 impact miners?
There’s no surprise that halving events significantly impact one of the most important parties of the Bitcoin ecosystem: the miners. They get remuneration from two sources, one from minting new blocks and the other from receiving fees for each transaction they confirm. Therefore, each halving event has a significant impact on their profitability. It’s a great chance that some will capitulate as a result of lower income, which could prove risky for the network. If Bitcoin loses part of its miners, the network could receive less computing power, which functions like a proxy for network security.
However, crypto experts don’t believe in this scenario because miners have plenty of time between halving events to adapt their operations. Also, the previous events didn’t lead to a decline in the hash rate.
How can investors trade Bitcoin during this period?
There are two ways to make a profit during this period; investors can speculate on the price of digital currencies using derivatives like CFDs or purchasing coins using exchanges.
Those who choose to trade digital currencies with derivatives benefit from not taking ownership of the coins, which allows them to trade them without using a wallet or account. They can also take a position on the digital currency, regardless if they expect its value to increase or drop. This method additionally offers the advantage of leverage, so they can open positions by putting down deposits to get a larger market exposure.
The next Bitcoin halving will most likely have implications for the crypto market because market participants could turn their attention to altcoins that offer better revenue when the mining rewards drop. We witnessed similar shifts in focus that caused increased interest and adoption of alternative coins. Therefore, the halving event from 2024 will impact the overall market capitalisation, prices, and overall relevance of the crypto environment. Those seeking ways to diversify their portfolios could turn their attention to digital currencies using Proof of Stake consensus mechanisms.