Bitcoin Just Completed Its Fourth “Halving,” Here’s What Investors Should Watch Now

On Friday evening, the Bitcoin network halved the incentives given to miners for the fourth time in its history.

The famous event, which takes place approximately once every four years as stipulated by the Bitcoin code, is designed to slow down the issuance of bitcoins, creating a scarcity effect and allowing the cryptocurrency to maintain its quality. digital gold.

There may be speculative trading on the event itself. JPMorgan said it expects bitcoin to fall after the halving and Deutsche Bank said it “does not expect a significant price increase.” However, the impact could be greater in a few months, even if Bitcoin continues its trend of diminishing returns from its halving to its cycle peak. Two key things to watch will be block reward and hash rate.

“Although the upcoming Bitcoin halving will create a supply shock like previous ones, we believe its impact on the price of the cryptocurrency could be amplified by the simultaneous demand shock created by the emergence of ETFs spot Bitcoin,” said Benchmark’s Mark Palmer.

The biggest immediate impact will be on the miners themselves, he added. They are the ones who operate the machines that record new blocks of Bitcoin transactions and add them to the global ledger, also known as the blockchain.

“Miners with access to reliable, inexpensive energy sources are well-positioned to navigate post-halving market dynamics,” Matthew Galinko of Maxim said in a note Friday. “Some mining companies, many of which are not public, could exit the market due to limited access to electricity, efficient machinery and capital. Mining companies with capital and relatively expensive energy will likely find opportunities following potential consolidation and disruption caused by the halving.”

The block reward

Miners have two incentives to mine: transaction fees that are paid voluntarily by senders (for faster settlement) and mining rewards – 3,125 newly created bitcoins, or about $200,000 as of Friday evening, when the mining reward passed of 6.25 bitcoins. The incentive was initially 50 bitcoins.

Reducing block rewards causes a reduction in the supply of bitcoin by slowing the rate at which new coins are created, helping to maintain the idea of ​​bitcoin as digital gold – the limited supply of which helps determine its value. Ultimately, the number of bitcoins in circulation will peak at 21 million, according to the Bitcoin code. There are approximately 19.6 million in circulation today.

“Miners use powerful, specialized computing hardware to validate transactions on the Bitcoin network and permanently record them on the blockchain,” said Marion Labore, an analyst at Deutsche Bank. “This process, known as mining, rewards miners with newly created bitcoins. But with each halving, the mining reward decreases to maintain scarcity and control the inflation rate of the cryptocurrency over time. time.”

Historically, after a halving, the Bitcoin hash rate – or the total computing power used by miners to process transactions on the Bitcoin network – fell, excluding some miners from the market. However, it generally recovers in the medium term, underlined Mr. Laboré.

The network’s hash rate is hitting highs not seen in months as miners attempted to take market share ahead of the halving. The growth of the Bitcoin hash rate dilutes the contribution of individual miners to the network hash rate.

“Over the last three halvings, the network returned to its pre-halving hash rate levels in 57 days on average,” she said. “It is also likely that current high Bitcoin prices may limit this near-term drop in hash rate as Bitcoin miners enjoy record profits as the halving approaches.”

Palmer said the impact of the halving on Bitcoin miners’ economics could be “more than offset over time” if rising Bitcoin prices continue to push the cryptocurrency to new highs in the months to come.