When Bitcoin Halves, What Happens?

On April 20th, the reward Bitcoin miners earn for adding new blocks to the cryptocurrency’s blockchain is cut in half.

This event, part of a regular and ongoing series of halvings is forecast to have a large impact on bitcoin price, if history is any predictor. So what exactly can bitcoin buyers expect to happen following a bitcoin halving?

Why Is Bitcoin Cutting the Block Reward?

The upcoming Bitcoin halving is a built-in feature of the cryptocurrency and its digital ledger. Each time Bitcoin’s block reward halves, the creation of new Bitcoin becomes twice as difficult.

The primary reason for this mechanism is as a counter to inflation, as each new halving creates additional scarcity. This, in turn, pushes BTC prices higher and prevents the currency from losing value over time.

This isn’t the first time Bitcoin has halved. Three halving events have already taken place. The first occurred in 2012, followed by two more in 2016 and 2020. Through these progressive halvings, the reward generated for each new block has fallen from its original level of 50 Bitcoin per block to a modest 6.25 Bitcoin.

After the upcoming split, the reward will once again be cut, this time dropping to 3.125 BTC per block. This cycle will continue until 2140, when Bitcoin is expected to reach its maximum supply of 21 million coins.

What Will Happen to BTC Prices?

Unlike a stock split, which doesn’t create additional value, the Bitcoin halving event is likely to send Bitcoin prices higher. This is because the halving affects the creation of new Bitcoin instead of the existing supply.

Because the block reward will be 50 percent lower going forward, Bitcoin prices are likely to rise as it becomes more difficult to create new ones.

Historically, halving events have been associated with dramatic spikes in BTC prices. In the case of the upcoming halving, there’s at least a decent possibility that a squeeze between supply and demand could trigger a renewed bull market.

This is because long-term BTC holders are usually reluctant to sell their existing supplies, even if prices continue to set new records. As such, demand will have to be satisfied by the creation of new and harder to mine Bitcoin.

Because rising Bitcoin prices will require an imbalance between supply and demand to materialize, it’s likely that little will happen on the day of the halving event itself.

Only as the supply begins to tighten will prices gradually rise. For this reason, it’s better to view the halving as an ongoing change to the Bitcoin market than a single-day event.

Is Now the Time to Buy?

For those who are bullish on cryptocurrency, buying before the reward halves has historically been a good strategy.

Even though the halving event is a known and predictable feature of the Bitcoin ecosystem, analysts dispute whether the effect is fully priced in yet.

BTC prices set a new record on March 14th, suggesting that traders may already be bidding up the price to account for the diminished supply.

That view may not fully account for the dynamics of the Bitcoin market at the moment, though. Most of Bitcoin’s price gain this year can be linked to ETFs that track the price of the currency.

These ETFs, a relatively new way for investors to gain exposure to Bitcoin without directly buying and selling the cryptocurrency itself, have driven up demand and created the conditions for higher prices. Institutional investors have also been padding their BTC positions.

Another piece of upward pressure could come from a shakeout among Bitcoin miners after the halving takes place. With block rewards cut in half, mining companies that are only marginally profitable today will likely find it difficult to stay in the black.

Although larger miners are likely to step in to fill the gaps, disruption on the mining side of the market may further reduce the rate at which new Bitcoin are created. This, in turn, would tend to promote higher prices.

Bitcoin Speculation Threatens Weak Hands

Though bullishness surrounds the prospects for bitcoin, especially around halving events, some analysts argue that selling pressure will mount as prices climb.

The reason for the bearish view stems from a suspicion that bitcoin wallets that have lain dormant for years come to life as long-term holders choose to sell and lock in the high prices they have anticipated for so long.

As large whales begin selling, the potential wave of supply has the potential to outstrip demand, creating lower prices.

Bitcoin is also notorious for going through bust cycles after reaching new heights. Although the cryptocurrency still probably has room to run, especially with the upcoming halving, investors who buy at today’s high prices run the risk of seeing their holdings collapse later on.

Over the past few years, many investors exited the market as massive drawdowns substantially hurt their portfolios. A number of them will not return, no matter where bitcoin’s price settles.

So, What Happens When Bitcoin Halves?

With so many different views of what could happen after Bitcoin halves, it’s clear that there’s some uncertainty in the market. The most likely scenario, however, appears to be sustained upward pressure on Bitcoin prices.

A strong demand driver at this time comes from the capital flows that previously had not existed in the form of exchange-traded funds, like IBIT.

As to how far these trends drive prices higher, there are virtually an infinite number of viewpoints. Some bulls expect prices to go as high as $250,000. Such predictions, however, have been rampant throughout Bitcoin’s history and have generally failed to materialize. Barring a sudden and unexpected surge in demand, Bitcoin is unlikely to achieve such a high level anytime soon.

Even factoring out overenthusiastic bulls, though, there is a good argument to be made for large returns from Bitcoin over the coming year or two.

Bernstein analysts foresee prices of up to $150,000 by 2025. A price in or around that level would translate to more than a double from levels seen in late Q1 2024.

At the end of the day, Bitcoin appears likely to continue its choppy but ultimately impressive climb for the foreseeable future. With supply somewhat limited and the degree of difficulty mining increasing, the odds of higher prices favor the bulls.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.