Bitcoin Halving: Pre- Or Post-Event Investment Strategy?

Bitcoin halving is an event that occurs roughly every four years, cutting the number of bitcoins awarded to successful miners in half. The next halving event, which will reduce the reward from 6.25 bitcoins to 3.125, is expected to happen in mid-April 2024 and could push the asset's price higher. Bitcoin prices have historically risen in the months and years following halving events, with the cryptocurrency's price quadrupling since January 2023. However, Bitcoin is a volatile asset, and investors are cautioned against trying to time the market. Instead, a long-term outlook and a dollar-cost averaging strategy are recommended when investing in Bitcoin.

Bitcoin's price history after halving

Bitcoins Price History After Halving

Bitcoin halving events have historically been followed by a four-year cycle of rallies, pullbacks, and blow-off tops. The halving impacts the Bitcoin market by reducing the rate at which new bitcoins enter the market, thus affecting the dynamics of supply and demand.

The first Bitcoin halving occurred on November 28, 2012, reducing the block reward from 50 BTC to 25 BTC. At the time of the halving, the price of Bitcoin was $13, and it peaked at $1,152 the following year.

The second halving took place on July 16, 2016, with a block reward of 12.5 BTC. Bitcoin's price was $664 at the time, and it reached a peak of $17,760 in the subsequent year. This event brought Bitcoin and crypto into the spotlight, with increased media attention.

The third halving occurred during the COVID-19 pandemic on May 11, 2020, further reducing the block reward to 6.25 BTC. The price of Bitcoin at the time of the halving was $9,734, and it peaked at $67,549 in the following year. Despite the economic shutdown, the price pattern for Bitcoin mostly followed previous cycles.

On average, Bitcoin's value has increased by about 125% in halving years, with even higher gains of around 415% in the year after a halving. However, it's important to remember that past performance doesn't guarantee future results, and there are other macroeconomic factors that can influence Bitcoin's price.

The best time to invest for maximum gains

Bitcoin halving is an event that occurs approximately every four years, where the number of bitcoins awarded to successful miners is cut in half. This event is designed to slow the influx of new bitcoins and reduce the rate at which they enter circulation, ultimately influencing Bitcoin's scarcity and value.

Bitcoin's Historical Performance Around Halving Events

On average, Bitcoin has increased roughly 125% in value during halving years. However, the year after a halving tends to produce even higher gains, with an average return of 415%. This means that an investment of $1000 would be worth more than $5000.

Factors Affecting Bitcoin's Price

Bitcoin's price is influenced by a combination of supply and demand dynamics, as well as market sentiment and broader adoption.

Supply and Demand

By reducing the rate at which new bitcoins are introduced into the market, halving events decrease the supply growth rate. Even if the demand for Bitcoin remains constant, its price must increase to compensate for the reduced supply.

Market Sentiment and Adoption

The approval of Bitcoin spot ETFs by regulatory bodies, such as the U.S. Securities and Exchange Commission, has had a positive impact on Bitcoin's price. These approvals have resulted in billions of dollars in inflows, indicating strong institutional demand for Bitcoin products.

Additionally, a broader range of investors, including large portfolio managers, are now incorporating Bitcoin into their asset allocations. This increasing demand, coupled with a limited supply, can drive up Bitcoin's price.

Timing the Market

While historical data suggests that investing before a halving event may lead to potential gains, it is important to remember that past performance is not a guarantee of future success. Bitcoin is a highly volatile asset, and investors should carefully consider their risk tolerance and investment horizon before making any decisions.

Instead of trying to time the market, investors should focus on Bitcoin's long-term potential. Historical data shows that Bitcoin's price tends to be cyclical, and holding the asset for at least four years, which is the time between each halving event, has resulted in positive returns.

In summary, while there may be potential for maximum gains by investing before a Bitcoin halving event, it is crucial to approach any investment in Bitcoin with caution and a long-term perspective. Conduct thorough research, understand the risks involved, and ensure that any investment aligns with your financial goals and risk tolerance.

Bitcoin's finite supply

Bitcoin has a maximum total supply limit of 21 million coins, and this is hardwired into its code. The Bitcoin protocol cuts in half the number of coins awarded to successful miners roughly every four years, or once 210,000 blocks are added to the blockchain. This is known as a Bitcoin halving.

Each halving reduces the supply growth rate of Bitcoin, and with fewer new Bitcoins entering the market, the dynamics around supply and demand change. As a result, even if the demand for Bitcoin remains constant or grows, its price must increase to compensate for the diminished supply growth. This has historically led to dramatic increases in Bitcoin's price, with the year after a halving typically producing the best gains.

However, it's important to remember that past performance is not a guarantee of future success. While Bitcoin's finite supply can drive up its value, it's just one factor influencing the complex dynamics of cryptocurrency prices.

The finite supply of Bitcoin also has implications for Bitcoin miners. As the number of Bitcoins issued gets closer to the 21 million limit, the reward system will transition to relying solely on transaction fees. This could impact the incentives for miners to continue supporting the network, and they may push transaction fees higher.

By the early 2030s, nearly 97% of Bitcoin is expected to be in circulation, and the remaining 3% will be mined over the following century, with the last Bitcoin likely to be generated around the year 2140.

In summary, Bitcoin's finite supply of 21 million coins is a key characteristic that sets it apart from traditional currencies, which do not have hard limits on supply. This finite supply, combined with halving events, can drive up the value of Bitcoin by reducing its supply growth rate. However, it's just one factor influencing Bitcoin's complex price dynamics, and there are no guarantees of future performance. The finite supply also has implications for the incentives of Bitcoin miners, who may eventually rely solely on transaction fees as rewards.

How halving affects the broader investment landscape

Bitcoin halving is an event that occurs roughly every four years, slowing the influx of new bitcoins and affecting the broader investment landscape. The halving event involves halving the number of bitcoins awarded to successful miners, which, in theory, increases the asset's value due to the reduced supply growth. This event influences Bitcoin's scarcity and, consequently, its value.

The halving event also has broader implications for the investment landscape. It encourages a long-term investment strategy, as investors who simply buy and hold Bitcoin for at least four years have historically never resulted in a loss. This strategy takes advantage of Bitcoin's cyclical behaviour, where prices tend to increase in the year after a halving and then tumble two years after the event.

Additionally, the halving event can impact other cryptocurrencies and their ecosystems. For example, after Bitcoin's initial surge following the halving, attention may shift to other cryptocurrencies like Ethereum and Solana. This dynamic showcases how the broader investment landscape can be influenced by the flow of capital and investor attention.

Moreover, the halving event can affect the regulatory environment and taxation of cryptocurrencies. Understanding the norms, rules, and potential scams or schemes that may arise is crucial for investors to safeguard their assets.

In summary, the Bitcoin halving event has broader implications for the investment landscape beyond just the price of Bitcoin. It influences investment strategies, capital allocation across different cryptocurrencies, and the regulatory and taxation environment surrounding crypto assets.

The volatility of the crypto market

Volatility is a natural part of market activity, and it refers to changes in the price of an asset. It can be healthy, with steady increases or decreases in price within a general range, or it can be extreme, with rapid price movements in either direction. Extreme volatility often has a negative connotation because people associate it with market chaos, uncertainty, and loss. However, healthy volatility serves many purposes in a market, mainly creating opportunities for profit. For example, stock price changes enable traders to buy low and sell high.

The crypto market is known for its extreme volatility, with skyrocketing peaks and depressive troughs occurring at a much quicker and more extreme pace than prices of assets in mainstream markets. There are no indices to measure crypto price volatility, but a glance at historical price charts reveals the extreme volatility of cryptocurrencies. For example, in 2016, the price of Bitcoin rose by 125%, and in 2017, it rose again by more than 2000%.

There are several reasons why the crypto market is so volatile:

• Speculation and News Developments: News developments and speculation fuel price swings in both crypto and mainstream markets. However, their effect is exaggerated in crypto markets due to their lower liquidity. Crypto markets lack a robust ecosystem of institutional investors and large trading firms, which leads to heightened volatility.
• Influencers and Media Outlets: Media outlets, influencers, opinionated industry moguls, and well-known cryptocurrency fans create investor concerns, leading to price fluctuations. For example, a single tweet from Elon Musk has been known to significantly affect the value of Bitcoin.
• Supply and Demand: As with most commodities, supply and demand play a crucial role in determining the price of Bitcoin. The closer the circulating supply gets to the limit of 21 million coins, the higher the prices are likely to climb.
• Investor Actions: Bitcoin volatility is also driven by investors, especially those with large holdings known as "whales." If whales were to suddenly sell their Bitcoin holdings, it could cause a panic that leads to a rapid drop in prices.
• Fear and Greed: Fear and greed are primary drivers behind Bitcoin's volatility. Investors fear missing out on big upswings or falling victim to large downswings, causing them to panic sell or buy, which influences demand and prices.
• Belief in its Utility: The varying belief in Bitcoin's utility as a store of value and a method of value transfer also contributes to its volatility. Some investors believe it will retain its value and continue growing, while others are sceptical.
• Regulations and Government Agency Views: Rumours about regulations and the views of government agencies, such as the IRS in the US, can also impact Bitcoin's price in the short and long term. For example, China's crackdown on cryptocurrency transactions and mining in 2021 led to a significant drop in Bitcoin's price.

While the crypto market is known for its volatility, there are signs that it may be turning a corner. Institutional investors and trading firms are entering the market with more conviction, and a derivatives market for cryptocurrencies is also beginning to take shape. As the crypto market continues to mature, it may eventually exhibit volatility patterns similar to those seen in mainstream assets.

Frequently asked questions