Bitcoin's fourth halving has passed, setting the stage for a new era.
Few events in the dynamic realm of cryptocurrencies have garnered as much attention and potential impact as this one. Bitcoin's (BTC -0.62%) Reduce by half. On April 19th, Bitcoin marked a pivotal moment in its journey, marking its fourth halving.
While past performance does not always predict future results, a closer look at the halving reveals Bitcoin's resilience and potential for significant price appreciation.
Image source: Getty Images.
What is halving
Approximately every four years, or every 210,000 blocks added to the blockchain, a halving occurs, reducing the payments given to miners for resolving blocks, known as proof of work.
Since this is the primary means by which new Bitcoins enter circulation, the reduction in miner rewards effectively lowers Bitcoin's inflation rate. Now that the fourth halving has passed, Bitcoin's inflation rate is only 0.85%, which is lower than gold. This process of reducing inflation will continue until 2140, when the last Bitcoin is expected to be mined, and supports robust monetary policy that prioritizes scarcity and finiteness.
Effect of half-life
The halving will reduce Bitcoin's inflation rate, effectively changing the dynamics of Bitcoin's supply and demand. As a result, even if demand remains constant, prices must rise to offset the decrease in supply. Essentially, the halving results in an increase in the price of Bitcoin.
This can be seen by analyzing Bitcoin's past performance after the halving. In years when a halving occurs, Bitcoin returns typically average around 125%. If this trend holds, the price will be $100,000, measured from the beginning of 2024.
Even better, as the effects of the halving become more established, the greatest benefits are typically achieved in the years following the halving. During this time, Bitcoin has grown by an average of nearly 400%. If this halving follows a similar pattern, Bitcoin's price could reach around $500,000 in 2025.
Exploring the current landscape further
While the halving alone can have a significant impact on the price of Bitcoin, there are several other developments that could make this halving different from others. A deeper look into the current situation should reveal that these potential price targets are not as sensational as they may seem.
First, it's important to understand that while the halving changed the production of Bitcoin, this halving was unique in that there was a supply shock. For the first time in history, fewer coins were available on exchanges during this halving than the previous one. Since reaching its peak in May 2020, the total number of coins available on exchanges has plummeted. There are currently around 2.2 million people, the lowest level since 2018.
Next, we have the Spot Bitcoin ETF. In January, the Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs, effectively opening the door for new buyers to enter the Bitcoin market. For individuals who are new to crypto exchanges or lack the technical knowledge required to operate a crypto exchange, these ETFs provide an easy way to access Bitcoin through traditional intermediaries. It provides a familiar and regulated means. An investor will be able to add Bitcoin exposure to his 401(k) plan or IRA, effectively lowering the barrier to entry for a wider range of investors.
Although it's still early days, we can see how popular ETFs are becoming. To meet pent-up demand, in mid-February, 11 ETFs were collectively buying Bitcoin at a rate of 10 times the daily production (about 900 Bitcoins). The initial buying frenzy has subsided, but if buying reaches these levels again, now that the halving has passed, the ETF will be buying at 20 times its daily production, adding to the Bitcoin price. There will be a lot of pressure.
Only time will tell how explosive this halving will be for Bitcoin. However, there is reason to be quite optimistic after a quick assessment of the impact of the halving and other factors such as existing supply shocks and the introduction of ETFs. Even though the price of Bitcoin is currently hovering around $66,000 as the effects of the halving materialize in the coming months, I'm still buying Bitcoin for the future.
