A New Dawn in Finance
The rules of money are rewritten as digital currencies stepped into the spotlight and started to redefine what we know about finance and economics.
Bitcoin, the world’s foremost cryptocurrency, has revolutionized economics, bringing a new dimension to the understanding of currency, finance, and monetary systems. The transformation Bitcoin brought into the market was thanks to the model and mechanisms behind it. An integral part of this model is a process known as Bitcoin halving.
What’s in a Halving?
Bitcoin halving, a once-in-every-four-years event, is a mechanism built into the Bitcoin protocol that reduces the number of new Bitcoins created and earned by miners by half. It occurs after every 210,000 blocks mined, approximately every four years, and is seen as a key moment in the cryptocurrency world.
The Principles of Economics: Supply and Demand
But why does the Bitcoin halving matter so much? The answer lies in the core economics of supply and demand.
Bitcoin’s halving directly impacts the number of new coins entering circulation. The Bitcoin protocol was designed with this deflationary/disflationary with a limited supply mechanism to manage scarcity, similar to the extraction of gold. When it becomes harder to mine gold, its value increases.
As we approach the next Bitcoin halving, a certain sense of anticipation builds in the crypto community. As of today, there are around 40,000 blocks left until the next halving, indicating that we are rapidly nearing another pivotal moment in Bitcoin’s lifecycle. The date of the next halving is predicted based on the current pace of block production, but it is typically four years from the previous halving, calculating less than 300 days left.
The Effect of Previous Bitcoin Halvings
We’ve seen this happen before. Let’s time travel back to November 28, 2012, when the first Bitcoin halving occurred. The humble Bitcoin was worth around $12. Fast forward a year, and Bitcoin had soared to nearly $1,000!
Then came the second halving on July 9, 2016. Bitcoin, now worth around $650, soared again to reach around $2,550 by July 2017. By the end of that year, Bitcoin had reached an all-time high of nearly $20,000.
The most recent halving occurred in May 2020 when Bitcoin was priced at $8,787. Following this halving, Bitcoin experienced a remarkable price surge, culminating in a new all-time high of $25,000 by the end of 2020, and continued to rise to its current all-time high of $69,045 in the next year.
This pattern suggests that halvings can lead to significant price appreciation in the months following the event. Yet the Bitcoin world isn’t in a bubble. It’s important to remember that many other factors can also influence Bitcoin’s price.
The Impact of Black Swan Events
While the economics of Bitcoin halving are rooted in supply and demand, external events can also significantly impact Bitcoin prices for better or worse. For instance, unpredictable, ‘black swan’ events such as the Covid-19 pandemic and the 2023 banking crisis, which caused global economic instability, increased the allure of Bitcoin and other cryptocurrencies.
As the Bitcoin halving draws near, the whispers of potential price hikes can turn into a roar of demand, pushing up prices. Large Bitcoin holders – or ‘whales’ in crypto-speak – can make waves on the graphs.
And let’s not forget, as the world’s “digital gold”, Bitcoin can be a safe haven in the storm during turbulent times, with increasing demand potentially pushing up prices. Conversely, such crises, if they result in stricter regulations on cryptocurrencies, could impact Bitcoin negatively.
The Interplay with Global Financial Policies
The global financial landscape can also influence the outcome of Bitcoin halving. For example, future changes in US interest rates could impact Bitcoin’s value. If interest rates decrease as anticipated by 2024, this could increase demand for assets like Bitcoin. On the other hand, a rise in dollar interest rates could put downward pressure on Bitcoin prices.
Furthermore, regulatory shifts in key markets like the US and the EU such as MiCA might affect Bitcoin and other cryptocurrencies’ valuation. However, it’s important to note that Bitcoin often demonstrates resilience against such changes due to its decentralized nature and community, and established market position.
The Ripple Effect on Altcoins
Bitcoin’s market trends often influence the entire cryptocurrency market due to its first-mover advantage and dominant market capitalization. Hence, the halving event could impact not only Bitcoin’s price but also the values of altcoins.
If Bitcoin’s value increases post-halving, altcoins might witness positive price movements. Additionally, the reduction in Bitcoin mining rewards post-halving could lead miners to turn their attention to these altcoins, potentially pushing their prices up too.
The Aftermath
The next halving can provide opportunities for traders as the interplay of various short-term factors creates a complex and dynamic pricing environment for Bitcoin. However, the importance of maintaining a long-term perspective cannot be overstated.
With Bitcoin nearing its predefined supply limit of 21 million coins and continuously expanding user base, its inherent scarcity positions it favorably for a consistent upward trend in the grand scheme.
“Over a million wallets are holding more than 1 Bitcoin, a mere 1.5 million Bitcoin left to be mined, and the existing Bitcoin supply is being steadily eroded due to wallet losses. The main focus shouldn’t merely be on the immediate halving event, but rather on the underlying principle and philosophy of Bitcoin itself, says our CEO Alexander Wermescher.
“As you navigate this journey, gaze at the horizon, and see the forest for the trees.”
