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The crypto market has been laying somewhat low in 2023 compared to its massive price swings that made constant headlines in recent years.
But we're now less than a year out from an event that has historically seen bitcoin's price rise during the lead-up and aftermath: bitcoin halving, which happens once every four years.
The regular event limits the amount of new bitcoins that come to the market. Because of the historical gains around bitcoin halving, some investors are hoping that the next halving, expected in April or May of 2024, could spur the start of a crypto bull run (a period of prices going up). That would be welcome news for investors, given that bitcoin prices — along with those of other financial assets, like stock prices — have taken a hit in the last year amid interest rates hikes and recession fears.
But can we actually expect a price boost as we head towards the next halving? Here's what crypto investors should know.
What is bitcoin halving?
Bitcoin halving has everything to do with bitcoin miners, who are involved in the process of creating new bitcoins. That includes everyone from individual hobbyists to corporate enterprises, with anywhere from one to thousands of specialized computers. These computers work constantly at the singular task of solving mathematical problems for the bitcoin network. If a computer solves a problem, it is rewarded with the bitcoin that is minted as a result of its work.
Bitcoin halving causes the total reward that miners receive for their work to be slashed in half. Miners currently earn 6.25 bitcoin for solving a problem, but they will begin to receive only 3.125 bitcoin for their efforts after the halving. From its very inception, bitcoin’s creator only ever intended for the supply to reach 21 million coins — and the goal of the bitcoin halving is to decrease the supply of new bitcoin overtime.
Much of the rhetoric around halving as a cause for a crypto rally has to do with this tightening of rewards. Many investors see the event as increasing scarcity of bitcoin and say it will inflate the coin’s value because of supply and demand economics.
Bitcoin halving has historically come with price gains
So far, there has been a bitcoin halving in 2012, 2016 and 2020 — and each one has seen the price of bitcoin rise in the months before and after the event.
Following the 2016 halving, for instance, bitcoin's price jumped to a record of nearly $20,000 per coin in 2017. In the year leading up to the May 2020 halving, bitcoin's price rose around 20%. Between the halving and the end of the year, bitcoin's price gained more than 200%.
Will there be a crypto bull run?
Some crypto experts are challenging the notion that the bitcoin halving is going to bring on a prolonged bull market. Crypto is still relatively new, so nothing should be taken as a certainty, says Omid Malekan, an adjunct professor at Columbia Business School. He adds that when it comes to the bitcoin network, nothing changes for anybody during a halving except for miners: There's a misconception that the halving reduces the overall supply of bitcoin, but it really just reduces the amount of new bitcoin coming on the market, Malekan says. The plan is that there will still ultimately be 21 million coins, as was always intended. Plus, the halving is no surprise.
"You would think [halving events] would be priced in long before the actual event and not have any material impact," Malekan says.
There's a lot of back and forth about whether or not the halving is baked into bitcoin's price, and whether the fact that bitcoins are scarce make them more valuable. Morningstar senior research analyst Madeline Hume's recent analysis of bitcoin scarcity indicates that the argument that increasing the scarcity of new bitcoin pushes up its value is reductive. Hume notes that bitcoin looks on charts like its pricing operates in four-year cycles, which seems to indicate a correlation between scarcity and price increases. But she also notes that, excluding the "honeymoon periods" that followed previous halvings, the relationship between the production of new bitcoin and prices is more or less negligible.
"[It could] be pure coincidence that bitcoin’s halving cycles arrived just as narratives around crypto reached their frothy peaks, and the relationship is totally spurious," Hume says. She goes on to also say that a major flaw in these scarcity-based analyses is that they all predict bitcoin's price will keep going up, which is impossible to know.
Could the bitcoin halving cause prices to drop?
It's possible that the bitcoin halving could actually cause the cryptocurrency's price to go down, Malekan says. The slashing of miners' rewards will make the practice less profitable and miners who are already struggling could be forced to shut down when their potential profits are cut in half, Malekan says. This could hurt the network's security since there would be fewer people monitoring activity.
"A lot of miners are suffering during this bear market and unless prices recover or fees go substantially higher, some will be forced to shut down once the block reward falls," Malekan says.
If there are gains, don't expect them to be long-lived
Hanna Halaburda, an associate professor at NYU Stern School of Business, says that post-halving gains are nothing more than hype, and that while prices may go up in the near-term, investors shouldn't expect a long-lasting bull market thanks to the halving alone.
“The only real explanation for why the price goes up is that we start talking about bitcoin more,” Halaburda says.
The halving, like many happenings in the world of crypto, gets a lot of social media chatter in its lead-up. Halaburda points to studies that say there is a relationship between social media posting and crypto price fluctuations. (Nowadays, a tweet from Elon Musk can send dogecoin's price soaring.) She adds that newer investors learning about the coin's limited new supply could help along a short-lived speculative rally, since they may have not been aware of the halving before.
Halaburda also says investors need to keep in mind that the halving won’t do anything to improve the use cases for bitcoin, which is ultimately what matters most for ensuring the longevity of the network.