Until a few years ago, the topics of bitcoin and cryptocurrency were incredibly niche. They fell firmly into the domain of “tech bro” investors who were willing to accept large swings in the value of their investments, hoping to make it or break it in a gamble on the asset class.
More recently, however, bitcoin has worked its way out of the Reddit forum and into mainstream conversation. While crypto investments are still largely unregulated, an increasing number of investors are considering a small allocation to the asset class in their portfolios. What’s more, the cryptocurrency recently reached a record price.
Last week, the asset class was trending in the news again thanks to the practice of “bitcoin halving”. This is a process which aims to control the supply of bitcoin, thereby protecting the value of the currency and preventing inflation. It takes place once every four years and can have a large impact on its value.
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The latest bitcoin halving took place in the early hours of Saturday morning (UK time). Since then, the price of the cryptocurrency has climbed. But will it continue to do so? We take a closer look at how the halving event works, and what it could mean for the fortunes of the asset class.
What is bitcoin halving?
To understand how bitcoin halving works, you need to know a bit about “bitcoin mining”, the process which brings new bitcoin into circulation.
When bitcoin was first created in 2009, the anonymous developer (or group of developers) known as Satoshi Nakamoto programmed a series of rules into the cryptocurrency. For example, to help protect the value of bitcoin, it was decided that a maximum number of 21 million coins would be brought into circulation. Currently, there are almost 19.7 million bitcoin in existence.
New coins are brought into circulation through a process known as mining. Bitcoin miners use computer technology to carry out this process. Put simply, the mining process involves solving a maths problem. Once solved, an official record of the bitcoin transaction is entered into a ledger (or database) known as “blockchain”. In exchange for their work, the first miner to solve the maths problem is rewarded in bitcoin.
As there is a finite number of bitcoins (21 million), the size of the reward or payment the miners receive is halved every four years to slow the rate of mining. When bitcoin was first created, miners received 50 bitcoin for every transaction. This has been halved four times since then, and now stands at 3.125 bitcoins.
When does bitcoin halving take place?
Bitcoin halving takes place roughly once every four years. The most recent bitcoin halving took place in the early hours of Saturday morning (UK time), on 20 April 2024.
Here is a full list of previous bitcoin halving dates:
- 28 November 2012 (bitcoin reward halved to 25 coins)
- 9 July 2016 (bitcoin reward halved to 12.5 coins)
- 11 May 2020 (bitcoin reward halved to 6.25 coins)
- 20 April 2024 (bitcoin reward halved to 3.125 coins)
What impact has bitcoin halving had on the value of the cryptocurrency?
Before the halving event even took place, bitcoin had been soaring to new heights. According to Jason Hollands, managing director at Evelyn Partners, this was partly in anticipation of the halving event, but also a result of bitcoin making its way into mainstream investment funds.
“Bitcoin’s resurgence looks like it’s being driven by its adoption into mainstream investment products in the US”, he said. “In January, US regulator the Securities and Exchange Commission authorised the first spot Bitcoin ETFs, which began trading soon afterwards. A plethora of funds have been launched, including ETFs from major players like BlackRock, Fidelity and Invesco.”
“The key point is that these spot Bitcoin ETFs – unlike futures or derivatives-based instruments that existed previously – actually hold the digital currency, so as they gain inflows they must buy more of it and that is likely to increase the underlying price of Bitcoin. Not least because there is a well-documented limited supply, thanks in part to the ‘halving’ process”, he added.
The bitcoin price has climbed since the halving event, echoing previous cycles, and is currently trading at around $66,000.
However, while bitcoin has increased in value in the leadup to and immediate aftermath of the halving event, some experts believe most of the gains have already been priced in. Analysts at Deutsche Bank said that they did “not expect prices to increase significantly following the halving event”, given that it had been “widely anticipated in advance due to the nature of the Bitcoin algorithm”.
Others actually expect the Bitcoin price to fall going forward. CoinDesk, a media outlet covering the cryptocurrency industry, reports that analysts from J. P. Morgan have issued a warning to this effect. “The bank sees downside for the world’s largest cryptocurrency after the halving because the market is still in overbought conditions, according to its analysis of open interest in bitcoin futures”, CoinDesk reports.
Before making any decisions, investors should remember that bitcoin is a high risk asset class. It isn’t for beginners, and you should be willing to lose any money that you invest. You should also be wary of crypto scams, which are becoming increasingly common.
If you are still keen to have some exposure to the cryptocurrency and its large swings in value, you could consider a small allocation as part of a diversified portfolio. Traditional investments like equities and bonds should have a larger weighting than high risk alternatives like bitcoin.
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