The basic economic principles of demand and supply also apply to cryptocurrency. With Bitcoin, though, there is a catch: it has a fixed supply. This supply is currently capped at 21 million Bitcoins, of which 19 million have already been mined. With a fixed supply, demand for bitcoins is the reason for the fluctuations in their value. However, there is another factor that adds to periodic fluctuations in value. This is known as Bitcoin halving.
What Is Bitcoin Halving and Why Does It Take Place?
Bitcoin halving is the process through which the Bitcoin protocol halves the block reward for new coins earned by miners every four years, which is the time period till the next halving. Perhaps the most crucial reason the Bitcoin halving takes place is to safeguard and enhance the scarcity of the currency by reducing the rate of bitcoins released into circulation. This lowers the amount of new supply, amplifying scarcity. On the other hand, it also promotes the sustainability of the currency because it ultimately leads to upward pressure on prices and promises of higher returns to investors.
The Bitcoin Halving of 2024
On April 19, 2024, the halving event took place, which was the fourth Bitcoin halving event in the lifespan of the currency. This year, the block reward for Bitcoin miners was reduced by half, from 6.25 BTC per mined block to 3.125 BTC per mined block. Historically, the aftermath of halvings has followed the same general trend. Here is what could potentially happen now:
1. Price Appreciation
Once supply is reduced, the price of bitcoin typically surges. Scarcity inflates prices due to fixed supply. On the demand side, price appreciation occurs because of increased interest by investors. The rise in the value of Bitcoin following the halving event offers the promise of an increase in investment value if the event’s effects remain the same, attracting investors. The market dynamics of increased media coverage and visibility often intrigue companies, leading to huge sums of investment in the stocks.
2. Volatility
Remember that the prospect of rewards after a halving event is subject to the market for Bitcoin and its microenvironment. Due to this, it is primarily attractive to speculators who buy Bitcoin in hopes of high returns.
However, being unable to meet these expectations can lead to sudden changes in sentiments and price swings, adding to volatility. Additionally, there are heightened emotions surrounding the event, which are likely to result in severe oscillations in investment, amplifying the prevailing turbulence.
What Now?
You can deduce the outcomes of the 2024 Bitcoin halving event from the past. However, is the past a good indicator of future performance when the macroeconomic conditions are prone to changes? Investors and analysts must remain adaptable, continuously assessing current conditions and considering various scenarios to navigate an ever-changing market.
Endnote
It has been two months since the halving event, which is not nearly enough to analyse its impact. Things may not be the same as before, causing a breakthrough in the market. Conversely, the trend may stay unchanged. While the future comes with its ambiguities, one thing is certain: halving events shall continue, tempting investors with consistency and predictability, as opposed to fiat money, making the market an ever-enticing jewel for speculators and investors.