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Bitcoin Halving: Kickstarting the Second Half of the Bull Market?

I. What is Bitcoin Halving?

Bitcoin halving is a predefined event within the Bitcoin protocol where the reward for mining new blocks is reduced by 50%. This mechanism has been in operation since the launch of Bitcoin in 2009. Initially, the reward for mining a new block was set at 50 BTC. Subsequently, every 210,000 blocks, the reward automatically halves. To maintain the smooth operation of the network, the Bitcoin system adjusts the mining difficulty every 2016 blocks (approximately every two weeks) to ensure that the average block creation time remains around 10 minutes. This means that the approximate cycle for Bitcoin halving is every four years.

In April 2024, Bitcoin will witness its fourth halving, reducing the block reward to 3.125 BTC. The smallest unit of Bitcoin is a Satoshi (SAT), equivalent to 0.00000001 BTC. According to the current halving schedule, by the 33rd halving in 2140, the block reward will decrease to below 1 Satoshi for the first time, signaling the end of Bitcoin mining rewards.

Bitcoin halving is a significant manifestation of its core principles. By slowing down the rate of new coin production, it effectively extends the issuance period of Bitcoin and the lifecycle of mining incentives. This gradually decreasing deflationary strategy differs fundamentally from the practice of central banks in traditional fiat currency systems, where they influence inflation or deflation by adjusting the money supply.

Bitcoin has set a supply limit of 21 million coins, providing a certain degree of predictability and transparency to the supply through a predetermined issuance schedule, unlike central banks that can issue fiat currency without limits. The design of Bitcoin halving aims to maintain a deflationary monetary policy for Bitcoin, ensuring that Bitcoin becomes increasingly difficult to obtain. This scarcity expectation increases over time, helping to maintain and elevate the value of Bitcoin.

 

II. Impact of Bitcoin Halving on the Industry

  • Decreased Supply and Inflation Rate

The most immediate impact of Bitcoin halving is on the supply of Bitcoin. The rate of Bitcoin production slows down, reducing the supply and consequently decreasing the inflation rate of Bitcoin. This limitation on supply helps to maintain the rarity of Bitcoin and has historically had a positive effect on its market price.

  • Increased Mining Difficulty and Hash Rate Consolidation

The Bitcoin mining industry will also be significantly affected by halving. Direct consequences of Bitcoin halving include reduced miner rewards, intensified competition, possible concentration of hash power resources toward large mining farms and pools, and continuous improvement of mining technology to cope with challenges. The reduction in block rewards compels miners to pursue higher efficiency to maintain their income levels, intensifying competition among miners. This process drives innovation in mining technology and equipment, making the mining industry more efficient and competitive. However, it may also pose greater challenges for small-scale miners, leading to further consolidation of hash power. After a period of consolidation, only efficient and well-capitalized miners can continue to compete.

  • Increased Market Attention

Bitcoin halving is a highly anticipated event in the market, attracting significant market attention in a short period. Before and after halving, there is a significant increase in community participation and discussion, leading to in-depth exchanges among developers, investorstraders, and new players entering the space. These discussions not only focus on the fundamental principles of Bitcoin and the complexity of blockchain technology but may also extend to the entire cryptocurrency industry, thereby increasing recognition and acceptance in the broader financial sector.

  • Impact on Related Tokens

In the early stages of industry development, many other cryptocurrencies imitated or forked Bitcoin's halving design, such as LTC, BCH, etc. With the approach of Bitcoin halving, tokens like LTC and BCH will also attract market attention and speculation. Of course, the market is most concerned about the impact of Bitcoin halving on its own price.

 

III. Impact of Bitcoin Halving on Its Price

Historical experience shows that halving events are crucial factors driving Bitcoin into new rounds of price increases. Each of the three previous halvings witnessed significant price increases for Bitcoin, reflecting not only the profound significance of Bitcoin halving within the industry but also its significant impact on trader investment strategies and market dynamics. Let's objectively review the historical data of the three previous halvings and their price trends.

  • First Halving

In November 2012, the first halving occurred, reducing the mining reward to 25 BTC per block.

On the day of halving, the price of Bitcoin reached around $12, which had roughly increased sixfold in the year leading up to halving. After halving, the price of Bitcoin accelerated, climbing to $1200 in a little over a year, achieving a hundredfold increase. Subsequently, due to changes in regulatory policies and the collapse of multiple exchanges, Bitcoin plummeted significantly, entering a deep bear market lasting 14 months. However, the first halving occurred when the market capitalization of Bitcoin and the cryptocurrency industry was too small, making the price increase less significant.

  • Second Halving

In July 2016, the second halving occurred, reducing the mining reward to 12.5 BTC per block.

On the day of halving, the price of Bitcoin was approximately $650, which had increased nearly fivefold in the year leading up to halving. After halving, the price of Bitcoin entered a consolidation phase, followed by a continuous bull market lasting 18 months. The price of Bitcoin reached $19,000, achieving a thirtyfold increase compared to the day of halving. Subsequently, history repeated itself, and Bitcoin entered another bear market lasting over a year.

  • Third Halving

In May 2020, the third halving occurred, reducing the mining reward to 6.25 BTC per block.

In the year leading up to halving, the BTC price ranged between $3000 and $4000, consolidating for nearly five months. Then it began a new round of price increases. Shortly before halving, the famous "312 event" occurred, causing Bitcoin's price to drop by over 50% within two days. Nevertheless, there was still strong anticipation for price increases after halving. After a brief adjustment, the price of Bitcoin quickly entered a frenzy of growth. In November 2021, the price of Bitcoin once again reached a historic high of $69,000, achieving an eightfold increase compared to the day of halving. Subsequently, lending institutions and exchanges like FTX collapsed one after another, and Bitcoin entered another bear market lasting over a year.

In the past three halving events, before halving, the price of Bitcoin experienced a certain increase, reaching a phase high, and often experienced a period of consolidation or correction near halving. After halving, the price of Bitcoin reached a historic high in about a year. Then, influenced by internal factors and external regulation, the price of Bitcoin would drop significantly and enter a bear market.

 

IV. Factors Driving the Second Half of the Bull Market

With the fourth halving approaching, the price of Bitcoin has already doubled in the past few months. This price increase is believed to be driven by the anticipated decrease in Bitcoin supply and increased demand from both retail and institutional investors (Bitcoin spot ETF). Similar trends observed in previous halving events reinforce this view.

Currently, the effective federal funds rate in the United States remains above 5%, with expectations of implementing a rate cut policy around July this year. The rate cut process is expected to be a relatively long period. Against this loose policy backdrop, the prices of risk assets such as Bitcoin are expected to continue to rise.

Additionally, historically, presidential election years in the United States are often considered periods of implementing loose economic policies. Governments tend to adopt loose policies before elections to stimulate the economy and increase the chances of re-election for the incumbent government or party. Market participants may also anticipate election years, which may themselves affect economic behavior and decision-making. For risk assets, this is another bullish factor.

Furthermore, the tremendous boost brought by Bitcoin spot ETF cannot be ignored. The launch of the Bitcoin spot ETF is considered a milestone event in the cryptocurrency industry, as it can attract a wider range of investors, including institutional investors and individuals who want to participate in the Bitcoin market through traditional investment accounts. As a regulated investment tool, ETF can increase the legitimacy and acceptance of Bitcoin in mainstream financial markets. For investors unfamiliar with cryptocurrency exchange operations or concerned about the security of holding Bitcoin directly, investing in Bitcoin through ETFs will lowers the investment threshold. All of these advantages will bring significant external funds and innovation momentum to Bitcoin.

In summary, combined with the price data of each previous Bitcoin halving and the dual drive of current macroeconomic and industry favorable factors, especially the launch of the Bitcoin spot ETF injecting new vitality into the market, there is reason to believe that the upcoming Bitcoin halving in April will further stimulate market optimism.

 

Disclaimer

The information provided is for general informational purposes only.  All information is provided in good faith.  However we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability or completeness of such information.  The statements or opinions expressed are those of the author(s) and do not necessarily reflect the views of BitMart or its affiliates, and shall not be considered professional financial investment advice. 

 

All crypto investments are highly speculative in nature and involve substantial risk of loss. Past, hypothetical, or simulated performance is not necessarily indicative of future results. The value of digital currencies can go up or down and there can be a substantial risk in buying, selling, holding, or trading digital currencies. You should carefully consider whether trading or holding digital currencies is suitable for you based on your personal investment objectives, financial circumstances, and risk tolerance.

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