Bitcoin halving 101: Hedging against inflation

08 May 2024

Bitcoin cut in half 

Bitcoin’s widely anticipated halving occurred on April 20th, 2024. But what is it? And how could it affect your holdings in Bitcoin? Find out the answers to these and more in this article.  

Key Takeaways 

- Any transaction that occurs on the Bitcoin blockchain is validated by a complicated series of mathematical equations completed by high spec computers (Bitcoin mining). Bitcoin miners are rewarded through the issuance of new Bitcoins.

- Bitcoin miners are rewarded with a new bitcoin for each and every block of transactions that they validate. Every 4 years, the rate of supply or issuance is cut in half, so only half as many new Bitcoins are issued each year. This is to keep the maximum supply at 21m Bitcoins over time.

- Bitcoin halving means there is much less new Bitcoin created and available on the market. Less supply typically leads to higher prices, or so the theory suggests.

The big debate 

Historically Bitcoin has experienced significant price increase within the year following the halving event, the big debate is whether the price increase was caused by the halving or other external factors.

How is Bitcoin created?

To “mine” Bitcoin, miners will compete to solve exceptionally complex math problems or with a highly specialised computer. The first miner to get the right answer (or closest to it) will be awarded with a Bitcoin, this process is called proof-of-work. Proof-of-work is the mechanism by which Bitcoin transactions are verified. It uses the mathematical answer as evidence that computational power was used. This allows the network to protect itself from fraud and bad actors. You can read more about proof-of-work here.

When miners are awarded Bitcoin, they add a “block” or place in the blockchain where information is stored and encrypted. The blockchain is a record of the Bitcoin’s transaction data and documents information about who has sent and received Bitcoin.

Will Bitcoin be created forever? 

Bitcoin has a programmed limit of 21 million units of Bitcoin. When all 21 million units have been mined, the code will stop releasing new units to miners. The limit ensures that additional Bitcoin can’t be created and the value “inflated away” like with regular fiat currencies.

Fast Fact: Today, we have roughly 19 million bitcoins in circulation. Bitcoin is programmed to stop after issuing 21 million units.

To limit the supply of Bitcoin, the rate of Bitcoin issued to miners is cut in half every 210,000 blocks mined.

When Bitcoin was established in 2009, 50 units of Bitcoin were released roughly every 10 minutes or per single block mined. Since then, Bitcoin has experienced three halving events to the level that as of 20 April, miners are now rewarded with only 3.25 bitcoin for each block mined.

You can see the halving events and the rewards for miners in the chart below

Fast Fact: Mining 210,000 blocks of transactions takes roughly 4 years. However, the rate of mining is variable, so it can be hard to pin down an exact date.

Fig.1. Source: Kōura Wealth. Bitcoin’s Halving Events vs. Supply of Bitcoin, highlighting how much Bitcoin decreases by after each halving event, 6 May 2024. 

Does the halving event push up Bitcoin's price?

In the past, the price of Bitcoin reached new records in the 12 months after each of the halving.  Some say that this is the result of the halving which means he same number of buyers are competing for less Bitcoin.

Fast Fact: The previous halving event occurred on May 11th, 2020, when the price of Bitcoin hovered around $9,000 USD. The price didn’t begin to see any significant changes until late July 2020 and 10 months passed before the price topped out at $61,283 USD on March 12th, 2021.

The alternate view is that these increases simply coincide with favourable markets. For example, the second halving coincided with a boom in all asset classes post-covid – many of which had to be bought with Bitcoin. This, along with the news coverage, is said to have pushed Bitcoin towards the mainstream and created demand for the asset class.

Bitcoin’s 2020 price rally has been attributed to “loose monetary policy and stay-at-home retail investors spending spare cash on cryptocurrencies”

Reuters, “Bitcoin halving: When will it happen and what does it mean for the price

Fig. 2. Bitcoin’s performance in the year after a halving, highlighting the relationship between the halving events and subsequent price increases; “Bitcoin’s ‘halving’: what is it and does it matter?” 19 April 2024, https://www.reuters.com/markets/currencies/bitcoins-halving-what-is-it-does-it-matter-2024-04-19/

What makes this Bitcoin halving different from others?

Bitcoin has just experienced another halving event. However, this halving event may be different from others. Institutional interest over the past few months and the approval of 11 spot Bitcoin ETFs in the US have driven a high level of demand for Bitcoin, pushing the price up to $69,711 on March 29th, 2024. This has driven up the price more than has previously happened before a halving event and has allowed more buyers to access Bitcoin.

Fast Fact: 70% of Bitcoin has not moved in the last 6 months, creating tight supply conditions and driving up price.

Another factor that may be affecting the price of Bitcoin, are the number of units actively being traded at any given time. The asset is experiencing especially tight conditions ahead of a sharp decrease in supply. This is further compounded by the fact that institutional investors have different holdings patterns from retail investors, often holding for the long-term and further skewing the relationship between supply and demand.

Bottom line: How should you respond to the 2024 Bitcoin halving? 

Price rallies caused by the halving event are not guaranteed. Due to this and Bitcoin’s extreme volatility, it is impossible to reliably predict what could happen following this most recent halving event. If you are already invested in Bitcoin, do not make changes to your strategy based on short-term data.

If you aren’t currently invested in Bitcoin and have decided you might be interested in the asset, carefully consider whether this is a suitable asset for you. Bitcoin can experience sudden and extreme swings in value – this includes decreases. If you decide you do want to invest in Bitcoin, don’t rush into it, set up your investment strategy for the long-term and start small.

Disclaimers 

Cryptocurrencies are highly volatile assets and not suitable for everyone. It is critical to understand that cryptocurrencies still have an uncertain future and are therefore not appropriate for all KiwiSaver members. Before investing part of your KiwiSaver balance in cryptocurrency, it is crucial that you have a clear understanding of all the associated risks: https://shorturl.at/irERY

Past performance is not a guarantee of future returns.

Members can only allocate a maximum of 10% of their portfolio to our Carbon Neutral Cryptocurrency Fund.

Kōura Wealth is the issuer of the Kōura KiwiSaver Scheme. View our PDS at kourawealth.co.nz/documents 

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