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Bitcoin's Fourth Halving: What Investors Should Watch

The Bitcoin network made a significant move, cutting the incentives rewarded to miners in half for fourth time
April 21, 2024

Bitcoin, the world's most famous cryptocurrency, underwent a significant event on Friday night as the network slashed the incentives awarded to miners by half for the fourth time in its history. This event, known as the Bitcoin halving, occurs approximately every four years as stipulated in the Bitcoin code. The purpose behind this celebrated event is to slow down the issuance of new bitcoins, thus creating scarcity and upholding the cryptocurrency's status as digital gold.

This event is not merely a routine occurrence within the Bitcoin ecosystem; it's an event that sets off a chain reaction across the cryptocurrency market. Speculative trading around the halving is not uncommon, and financial institutions like JPMorgan and Deutsche Bank have weighed in on the potential impacts. While some analysts expect a downside in bitcoin prices post-halving, the real impact might be felt in the months to come.

Benchmark's Mark Palmer pointed out, “While the upcoming Bitcoin halving will create a supply shock as the previous ones had, we believe its impact on the cryptocurrency’s price could be magnified by the concurrent demand shock created by the emergence of spot bitcoin ETFs.”

However, the most immediate impact will be on the miners themselves. These are the individuals or entities that run the machinery responsible for processing bitcoin transactions and adding them to the blockchain. With the reduction in block rewards, miners face a significant adjustment.

Maxim's Matthew Galinko explains, “Miners with access to inexpensive, reliable power sources are well positioned to navigate the post-halving market dynamics. Some miners, many that are not public, could exit the market with a combination of poor access to power, efficient machines, and capital. Miners with capital and relatively expensive power will likely find opportunities in the wake of potential consolidation and disruption driven by the halving.”

Previously, miners were rewarded with 6.25 bitcoins for every new block mined. With the halving, this reward is now halved to 3.125 bitcoins. This reduction in block rewards aims to reduce the supply of bitcoins, aligning with the cryptocurrency's design as digital gold, with a finite supply capped at 21 million coins.

Another important aspect affected by the halving is the Bitcoin hash rate, which represents the total computational power used by miners to process transactions on the network. Historically, after a halving, the hash rate has fallen, pricing some miners out of the market. However, it generally recovers in the medium term.

Deutsche Bank analyst Marion Laboure explains, “With each halving, the reward to mining is decreased to maintain scarcity and control the cryptocurrency’s inflation rate over time.” Despite the initial dip in the hash rate post-halving, Palmer believes that if bitcoin's price continues to rally, the impact on miners' economics could be offset over time.

As Bitcoin miners adjust to the halving's impact, the cryptocurrency market is bracing for potential shifts. With rewards slashed in half, miners are facing a new economic reality. However, as history has shown, the network tends to adapt, and if bitcoin's price rallies persist, the impact of the halving on miners' economics could be mitigated over time. For now, all eyes are on the cryptocurrency market to see how it reacts in the wake of this significant event.

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