The upcoming bitcoin halving is different from others before it. Here’s what investors need

Just a few years ago, the bitcoin halving was something celebrated by only the earliest cryptocurrency lovers, who swore by it as a core feature of a revolutionary, anti-establishment deflationary asset.

Now, bitcoin has been embraced by the biggest institutions on Wall Street and continues to draw curious retail investors in each cycle. From the gleeful to the perplexed to the unimpressed, crypto market watchers know this halving is coming and that it must mean something good for bitcoin.

This is a technical event that takes place on the bitcoin network roughly every four years, cutting the supply of the cryptocurrency in half to create a scarcity effect that makes it like “digital gold.” Historically, it sets the stage for a new cycle and bull run – but this one’s a little different.

“The halving is the ultimate geek event for bitcoiners, but the 2024 iteration takes it up a notch because reduced supply combined with fresh ETF demand creates an explosive cocktail,” said Antoni Trenchev, co-founder of crypto exchange Nexo. “What makes this halving unique is bitcoin has already surpassed the last cycle’s high — something it’s never done ahead of the quadrennial event — which makes trying to forecast the length and ferocity of this cycle much trickier.”

After the 2012, 2016 and 2020 halvings, the bitcoin price ran up about 93x, 30x and 8x, respectively, from its halving day price to its cycle top. Past performance isn’t indicative of future returns, and some even warn that in dealing with a smaller supply every four years, the days of such a big impact on the bitcoin price are likely already behind us.

However, Steven Lubka, head of private clients and family offices at Swan Bitcoin, said “if there was ever a moment to be a little extra optimistic” about returns after the halving, it’s this year.

“This bitcoin bull cycle — which kicked into gear earlier because of the January approval of the spot ETFs — might well be shorter and more explosive, culminating in a peak in late 2024 or early 2025,” Trenchev added.

Whether you seek a deeper understanding of bitcoin as a new, deflationary asset, or you simply want to speculate on the bitcoin price in the coming weeks, here’s what you need to know about the halving and its potential impact on the market.

What’s happening?

The halving occurs when incentives for bitcoin miners are cut by half, as mandated by the code of the bitcoin blockchain. It’s scheduled to take place every 210,000 blocks, or roughly four years.

As a refresher, miners run the machines that do the work (essentially solving a very complex math problem) of recording new blocks of bitcoin transactions and adding them to the global ledger, also known as the blockchain.

Miners have two incentives to mine: transaction fees that are paid voluntarily by senders (for faster settlement) and mining rewards — 6.25 newly created bitcoins, or about $437,500 as of Thursday morning. Sometime between April 18 and April 21, the mining rewards will shrink to 3.125 bitcoins. The incentive was initially 50 bitcoins, but that was reduced to 6.25 in 2020.

The reduction in the block rewards leads to a reduction in the supply of bitcoin by slowing the pace at which new coins are created, helping maintain the idea of bitcoin as digital gold — whose finite supply helps determine its value. Eventually, the number of bitcoins in circulation will cap at 21 million, per the bitcoin code.

Market impact now and later

The halving isn’t like an on-off switch that gets flipped at a specific time. Indeed, it’s reasonable to think that the day will come and go without much action in the market. Of course, there certainly could be volatility driven by speculators who may be trading on the event. Swan’s Lubka warned that investors shouldn’t confuse that with the technical change taking place.

“I don’t think we see a big move either way, but even if there were a big move, it’d have nothing to do mechanically with the halving,” he said. However, “in the months that follow, every day there [will be] something like $30 million in bitcoin less being sold. That can build up fast and make an impact over that time period.”

That $30 million assumes a bitcoin price of about $70,000.

The one big thing investors need to understand about the halving and its potential impact on the market, Lubka said, is that miners sell a lot of the bitcoin they get paid in order to pay their everyday bills.

“These are very costly enterprises that have to consume a lot of energy and other things to do their job,” he said. “Miners are constantly selling the bitcoin that they mine just to cover costs. When that gets cut in half, there’s no two ways about it: There is half as much bitcoin being sold from the miners.”

“They are the most regular sellers,” he added. “Some hedge fund could sell its position … but miners are selling every day, every week, every month in predictable quantity — and that pressure gets cut in half.”

Diminishing returns from halving to halving

Bitcoin has always shot to the moon in the months following its halving — that’s what makes it such a celebrated day among enthusiasts. However, each time the mining reward and supply of bitcoin has shrunk, so have the returns from the halving day to the cycle top.

“Guessing the endgame for bitcoin after each halving is the ultimate sport,” said Trenchev. “What we do know is each post-halving bull run has seen diminishing returns. … Even a measly 2x will put bitcoin around $130,000 — not to be sniffed at.”

That trend could reverse this year, Lubka said, although it’d be the result not of the planned supply shock but rather of the new demand shock. Thanks to the advent of bitcoin exchange-traded funds, demand for the cryptocurrency is bigger than ever, according to CryptoQuant.

The data shows that historically, “whale” demand for bitcoin spikes after each halving, driving prices higher. This year, however, that whale demand (which includes OG bitcoiners, new investors and bitcoin ETF holders) is already at an all-time high, and the block reward hasn’t even been slashed yet.

“The once-significant influence of bitcoin halving on prices has diminished, as the new issuance of bitcoin gets smaller relative to the total amount of bitcoin that is available for sale,” said Julio Moreno, head of research at CryptoQuant. “In contrast … bitcoin demand growth seems to be the key driver for higher prices after the halving.”