As we approach the middle of April, Bitcoin’s fourth halving event draws closer. This event – also known as “the Halvening” – will significantly impact Bitcoin’s supply landscape. The real supply-side effects of the Halvening, coupled with the investment narratives surrounding it, mean that understanding this event is essential for anybody interested in investing in Bitcoin.
Key Takeaways:
- The expected Bitcoin halving event will reduce the new bitcoins entering circulation by half, affecting its supply dynamics and potentially affecting its price.
- Historically, significant price rallies have followed Bitcoin halvings. Still, investors should be cautious of market speculation and the potential for “sell the news” scenarios, as seen in previous significant Bitcoin events.
- The scarcity induced by Bitcoin halving, combined with increasing network adoption, presents a compelling case for Bitcoin as a long-term investment despite the volatility in the short term.
Unpacking the Bitcoin halving
The Bitcoin halving is a pre-programmed event that slashes the block reward of Bitcoin miners by 50%, reducing the amount entering circulation. This event is slated to recur every four years until the final Bitcoin is “mined” around 2140. Bitcoin’s developers created this mechanism in order to hardwire scarcity and disinflationary (and ultimately deflationary) characteristics into the architecture of the asset. This trait was meant to position Bitcoin as a bulwark or alternative to the traditional fiat currency system, where money printing and inflation have a history of eroding the purchasing power of fiat money over time.
The Halving’s ripple effects
For those holding Bitcoin in their portfolios or looking to enter a Bitcoin position, a basic understanding of the halving is extremely important when creating an investment thesis.
The practical realities
Bitcoin is designed to be more scarce over time. Usage of the Bitcoin network and acceptance of Bitcoin as a legitimate asset class has steadily grown since its inception. So long as adoption continues to grow, Bitcoin’s halvings create a supply-and-demand reality that favours continued asset appreciation over a long time horizon.
How the Bitcoin halving influences investment narratives
Understanding what the Bitcoin halving does to the supply of the asset is important. The simple fact that Bitcoin is designed to increase its value over time could be a compelling enough reason to invest in it. Still, it is also important to build on this knowledge and identify key investment narratives that sprout from this event to navigate the short-term volatility of Bitcoin. Here are a couple of important things to keep in mind.
1) Market sentiment and speculation – The buildup to a halving event is typically marked by a surge in Bitcoin interest, accompanied by speculative fervour that could culminate in a “sell the news” event. If we look at another recent Bitcoin milestone, the US spot Bitcoin ETF approvals in January, we can see that the price of the asset climbed steadily up until the SEC announcement that they were greenlighting spot Bitcoin funds. When that announcement came, there was a large sell-off of Bitcoin, which spooked many investors. Such episodes highlight the importance of navigating market sentiment and speculative waves with a level head.
2) Understanding the long-term investment perspective – Looking at the long-term at a five- or ten-year time horizon and understanding what Bitcoin halvings do to the supply of Bitcoin becomes even more compelling. Yes, seeing a price spike within a few months or weeks of the Bitcoin halving is exciting. But the real takeaway here, as we mentioned above, is what these halvings do for the scarcity of the asset. When we zoom out and look at the fact that broad retail and institutional access to Bitcoin was only made possible in the US very recently with the approval of spot Bitcoin ETFs, we start to comprehend how much future demand over the next few years could possibly come into the asset class.
Final thoughts
The upcoming Bitcoin halving will significantly impact the number of bitcoins entering circulation. From a historical perspective, it is not unreasonable to assume that price appreciation will coincide with or follow this event. Looking long-term, though, is what is most compelling. As Bitcoin’s programmed scarcity collides with a growing demand for the asset and greater use of the Bitcoin network, it could prove to be a high-return investment for years to come.
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