The creation of bitcoin is reduced by half roughly every four years during the so-called halving. The fourth Bitcoin halving will take place in late April. What impact could a reduced production of bitcoin have on its market value? Haan Pacu-Chang of Purpose Investments shares his thoughts on this event, and how it may affect the market for spot bitcoin ETFs.

Leo Mindyuk and from ML Tech answer questions in Ask an Expert about halving.

We use both Bitcoin and Bitcoin in this article. To be clear, Bitcoin is the blockchain network, while bitcoin is the cryptocurrency.

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Bitcoins Fourth Halving

Bitcoin’s fourth half-life event is likely to occur in April this year. This event changes the supply dynamics for bitcoin, and historically has been linked to price increases in bitcoin and the wider crypto space. We will explain below what a Bitcoin halves is and its potential implications for investors.

What does a Bitcoin halving mean?

A Bitcoin halving occurs when the number of bitcoins in circulation is cut by half. It happens approximately every four years. This schedule will continue up until 2140, when the last bitcoin will be mined. The supply of bitcoins is limited to 21 million BTC. The Bitcoin creators created this mechanism to ensure bitcoin’s scarcity and its deflationary characteristics. This mechanism is designed to ensure that supply and demand laws will increase the value of bitcoin as long as adoption of the Bitcoin system grows. In this way, Bitcoin’s monetary policy can be seen as a counterweight to fiat currency, which has historically devalued over time. What you can buy today with a U.S. Dollar is much less than 100 years ago.

What the Fourth Bitcoin Halving Means for Investors

Impact of bitcoin price

In the past, significant price increases in bitcoin have preceded halving events. Since its creation a decade ago and a half, bitcoin’s adoption has grown steadily. The deflationary nature has led to a dynamic of supply and demand that has resulted in the price of bitcoin increasing each time it was halved. Past performance is not a reliable indicator of future outcomes. However, it is important to understand the implications of an asset with a low inflation rate that is growing in popularity.

Market sentiment and speculation

This anticipation can lead to an increase in interest in bitcoin. It also brings with it the inevitable rise of speculation and the possibility for a “sell-the-news” event. Prices increased as we saw with the anticipation of the SEC’s approval of U.S. bitcoin spot ETFs, which was another major event that brought bitcoin to light. After the funds were approved there was a short-term sell-off, which caused the price to drop steeply. Bitcoin’s value has recovered since the sell-off. However, investors should remain aware of the market sentiment and speculative trend leading up to the halving to best position themselves.

Understanding long-term investments

Understanding what Bitcoin halvings will do in five to ten years’ time is even more important. It is thrilling to see a price increase within months or even weeks after the halving. The real lesson here is how these halvings affect the scarcity of an asset. We can see that the U.S. only allowed institutional and retail access to bitcoin a few months ago, with the approval spot bitcoin ETFs. This gives us a good idea of how much demand there could be in the future.

Final Thoughts

The Bitcoin halving will have a major impact on the amount of bitcoins that enter circulation. From a historical perspective it’s not unreasonable to expect that the price will increase in conjunction with this event or afterward. The most compelling thing to do is look at the long term, as the programmed scarcity of bitcoin collides with the growing demand for it and the greater use of its network.

– Haan Palcu-Chang, crypto content specialist, Purpose Investments

Q. What is Bitcoin halving and why is this important?

A Bitcoin miner receives a reward set for validating a new block. Bitcoin halving occurs when the reward to mine new blocks is cut in half. The miners will receive 50% less Bitcoin for verifying transactions. The halving method highlights the scarcity and value of bitcoin, in contrast to inflationary fiat-printing mechanisms.

Q. How does the bitcoin market react to halving?

A. Bitcoin’s halving will have a variety of effects on the market. Primarily, through supply and miner activity.

  1. According to basic economic principles, a reduced supply combined with a constant demand will likely lead to an increase in the price.
  2. The halving of the reward for miners can have a negative impact on their profitability. Unprofitable miners may leave the network, and it will be difficult to mine a block that is adjusted to a different market equilibrium.
  3. In the past, halving events led to increased speculation, volume and price volatility.

Q. Why could this halving differ?

A The new daily demand for bitcoins is significantly greater than the supply. This is due to the recent approval of spot ETFs and the inflows of institutional capital through ETFs. The combination of the demand for new BTC and the reduced supply due to the halving could create an even stronger upward pressure on price.

Leo Mindyuk, CEO, ML Tech

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