Fervent Bitcoin trading approaches fresh supply crunch; Here’s what this week’s ‘halving’ event implies

Bitcoin's recent surge to record-breaking highs has left many scratching their heads in awe. Within the first two weeks of March, the cryptocurrency defied gravity, surging 30% and reaching an all-time high of $73,000 or ₹60.5 Lakhs on March 13.

The surge was thanks to two major factors as per experts: US SEC’s approval of spot Bitcoin ETFs and the upcoming Bitcoin halving. By April 19 or 20, the Bitcoin halving is expected to occur in order to reinforce this inherent scarcity. Here’s what the latter means for investors.

Read Also: Bitcoin’s bizarre hike renewed enthusiasm last quarter! What does the future hold for investors?

What sets Bitcoin apart from traditional assets like stocks and bonds is its decentralized nature and finite supply. Scheduled to occur approximately every four years, Bitcoin halving involves reducing the reward miners receive for validating transactions by half — a mechanism that is hard-coded into Bitcoin's protocol. And this has inevitably led to a rally in prices in the past.

“Historically, Bitcoin had a bull run after every halving. Though the correlation between Bitcoin halving and price is not always immediate as seen in the last three halvings, this year we’re already seeing a run-up in prices. After the first halving, in Nov 2012, the price jumped from $12 to $1207 within a year. From $647 around the second halving in 2016, Bitcoin surged to $20,000 by Dec 2017. In the third halving of May 2020, we saw the price go from $8500 to $11,950 in 100 days and $65,000 by Nov 2021,” explains Balaji Srihari, Business Head at CoinSwitch.

So, what is Bitcoin halving?

Launched in 2009 by the enigmatic Satoshi Nakamoto, the virtual asset is often referred to as "digital gold" with an ability to retain value in a world fraught with economic uncertainty. Bitcoin’s appeal lies in its scarcity and the belief that it offers a hedge against inflation and manipulation from any authority in power. As governments across the world conducted unprecedented quantitative easing post-pandemic, it only helped reassure this belief among many ‘unconventional’ investors.

While the supply of most other currencies has been dramatically going up in the global economy over the last few decades, the halving events in Bitcoin’s protocol are designed to curtail its supply until the complete stop to its supply eventually. How exactly does it happen?

Imagine you have a magical machine that can create gold coins, but there's a rule: every four years, this machine automatically reduces the number of gold coins it produces by half. This means that if it originally produced 10 coins per hour, after four years, it will only produce 5 coins per hour. Now, replace the gold coins with Bitcoin, and you've got the basic idea of Bitcoin halving!

In the Bitcoin network, there are miners — computers that validate and secure transactions by solving complex mathematical problems. As a reward for their efforts, miners receive new Bitcoins. But, just like our magical machine, there's a rule built into the Bitcoin protocol that every four years, the number of new Bitcoins created as a reward for mining is cut in half. This is what is known in the industry as "Bitcoin halving."

So, why does Bitcoin halving matter?

Going back to the basics of economics, it's all about supply and demand. When the supply of new Bitcoins is reduced (halved), but demand for Bitcoin remains constant or increases, basic economic principles suggest that the price of Bitcoin may rise. This is because there are fewer new Bitcoins entering the market, making existing Bitcoins more valuable.

Bitcoin halving events are significant because they affect the rate at which new Bitcoins are created, ultimately influencing the supply side of the Bitcoin market. This event is programmed into the Bitcoin protocol and occurs roughly every four years until the maximum supply of 21 million Bitcoins is reached by the year 2140.

But, while the event makes Bitcoins scarcer and potentially more valuable, it is an expected event, a part of a four-year cycle. So, with this added layer of predictability, will it have any significant impact post-halving? Yes, say industry experts.

“The indicators this time around, are all pointing to another upward rally. This year, Bitcoin also has other tailwinds. After gaining approval in January 2024, Bitcoin ETFs in the US such as the one offered by Blackrock and Fidelity have been buying up over 10,000 BTC per day creating a massive demand-supply gap,” Srihari told Business Insider India.

Rajagopal Menon, VP at WazirX, says, “If historical patterns were to be followed, the prices of BTC might not undergo a significant surge before two months post-halving. However, Bitcoin has already defied that by reaching its all-time high before halving, for the first time ever. The next financial year will be quite promising for crypto with Bitcoin halving ensuring a surge in prices, with demand-supply dynamics being a key lever. India will witness a greater adoption rate for virtual digital assets with increased liquidity in the market.”

“The 2024 halving is distinct due to the introduction of spot Bitcoin ETFs in the US, changing investment flows, and an evolving market structure… This synergy between ETF adoption and evolving market structures lays a robust foundation for Bitcoin's continued rise. While Bitcoin has always held the spotlight as the most popular crypto, the event will have broader implications for the entire ecosystem,” writes Sumit Gupta, Co-founder of CoinDCX in an Economic Times column.

Scepticism continues

Bitcoin's journey from fringe fascination to mainstream asset hasn't been without its challenges. Sceptics argue that its volatile nature makes it unsuitable for serious investors, while regulatory concerns loom large over its future. And past performance is not indicative of future results, the historical correlation between Bitcoin halving events and price appreciation has not gone unnoticed by investors. As April’s halving event approaches, speculation is rife about its potential impact on Bitcoin's price trajectory and is likely to have already been factored in.

The past rallies post-halving also coincided with larger macroeconomic trends like the European debt crisis in 2012, the crypto world seeing the initial coin offering (ICO) boom in 2016, and the COVID-19 pandemic and unprecedented quantitative easing that followed in 2020. All these events contributed to heightened interest in Bitcoin during respective years. While Bitcoin's price may experience short-term volatility around the time of the halving, its long-term trajectory is influenced by a multitude of factors, including market sentiment, adoption trends, regulatory developments, geopolitical conflicts, and macroeconomic conditions.

In a recent survey conducted by the Deutsche Bank, more than half (52%) of the 3,600 respondents expressed belief that cryptocurrencies will become an “important asset class and method of payment transactions” in the future. This is a significant change compared to the September 2023 survey when less than 40% of the respondents expressed a similar belief. However, 33% of the respondents expect Bitcoin to fall to $20,000 — less than one-third of the current levels — while only 10% believe that the prices will cross $75,000 by the end of this year.

In conclusion, Bitcoin's recent ascent to all-time highs underscores its growing relevance in today's financial landscape but it remains a risky asset class. As cryptocurrency continues to capture the imagination of investors worldwide, it's essential to approach it with a blend of optimism and caution. Understanding and considering the implications of crucial events like the upcoming halving is important while making any investment decisions.

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