The Bitcoin Halving – what does it mean for you?

The Bitcoin Halving, occurring approximately every four years, reduces miners' rewards and limits the issuance of new Bitcoins, affecting its supply dynamics. This scarcity mechanism historically leads to increased demand and upward price pressure. Investors and traders closely monitor halving events due to their significant impact on Bitcoin's market behaviour. It often results in price surges following reduced block rewards.

This article aims to demystify the concept of the Bitcoin Halving, explore its potential effects on the cryptocurrency landscape, and offer insights into how individuals can prepare for this significant event.

What is the Bitcoin Halving?

Firstly, it's essential to acknowledge that Bitcoin operates within a finite system, with a maximum limit of 21 million Bitcoins that can ever exist. This limited supply is further constrained by an estimated 6-8 million Bitcoins lost to forgotten passwords or discarded hardware, adding scarcity to the equation.

Bitcoin is created, or 'mined,' by computers worldwide that validate new transactions, known as blocks, on the Bitcoin blockchain. These computers, referred to as 'miners,' serve as the worker bees of the Bitcoin network. The exact number of Bitcoin miners is challenging to determine due its decentralised nature. Each new block created by a miner results in a reward paid out in Bitcoin. This reward diminishes by half every 210,000 blocks mined, occurring approximately every four years. This is a hardcoded feature of the Bitcoin protocol. Currently, 93% of all possible Bitcoins have been mined.

This deflationary model is a fundamental aspect of Bitcoin's design. While the overall supply of Bitcoin gradually increases, it does so at a decreasing rate, aligning with basic economic principles of supply and demand. Although Bitcoin's creators couldn't have foreseen the demand side, they intentionally engineered the supply to be finite.

Bitcoins deflationary nature stands in stark contrast to conventional fiat currencies, where inflation is often a deliberate policy tool. Consider this hypothetical scenario: Mary invests AU$1,000 in Bitcoin, while Bob holds onto Australian dollars. Over a year, the Australian government increases the money supply, leading to inflation and diminishing Bob's purchasing power. Meanwhile, Bitcoin's fixed supply and growing demand result in its appreciation, preserving and potentially enhancing Mary's investment value.

Impact on the crypto landscape

Bitcoin's price action continues to set the pace for the broader crypto market. What sets this cycle apart, is the launch of US spot Bitcoin ETFs in January. In the first quarter of 2024 alone, net inflows into these ETFs have surpassed US$12 billion, with approximately 4% of the total Bitcoin supply now held by nine US providers. The launch of the ETFs saw Bitcoin's price increase by almost 60%, surpassing all-time highs in mid-March. It highlights growing institutional participation within ETF structures, and exerts considerable pressure on leading traditional exchanges worldwide to list Bitcoin ETFs.

Turning our attention to the Australian market, the anticipation surrounding the approval of spot Bitcoin ETFs by the ASX is poised to reshape the crypto landscape in Australia. With Digital X, VanEck, and Betashares all filing applications to list spot Bitcoin ETFs, the market eagerly awaits regulatory approval.

How can investors prepare for the halving?

While holders of Bitcoin don't need to make any changes, it's important to understand the potential consequences of the halving, particularly for Bitcoin miners. As the event approaches, Bitcoin miners will see their rewards drop instantly. This may affect their profitability and operations. In response, miners may need to sell their Bitcoin to cover their operational expenses, potentially leading to increased selling pressure in the market.

The BTC Markets website provides a halving countdown page, estimating the halving date (April 17th, with a little over 1,000 blocks left to be mined at the time of writing.) This tool can help investors track the event's progression and stay informed about its potential impact on the market.

The future of Bitcoin

Bitcoin continues to evolve as a maturing asset, distinguishing itself as a leader in the digital space. Unlike traditional assets, Bitcoin exhibits resilience against singular events, highlighting its role as a store of value and a hedge against fiat currencies.

Recent academic research has highlighted Bitcoin's potential as a hedge for US dollar currency pairs in the short term. Gaps remain, nonetheless. Bitcoin may not yet be classified as a safe haven asset, with market and infrastructure maturity still to come. However, its growing adoption, liquidity, and strength, position it as a significant player in the broader investment landscape.