Much is still unknown about the quadrennial Bitcoin halving event, which halves the block rewards earned by Bitcoin miners, who play a critical role in validating BTC transactions and securing the system.
Will miners go bankrupt or flee the network? Will the hash rate collapse? Will the price of Bitcoin rise and then fall? Will halving spur greater crypto adoption? And so on.
But this much is certain: Every four years, miners’ block rewards are cut in half — this is pre-coded into the network — and sometime in April 2024, once the 210,000th block is validated, the rewards of miners will drop from 6.25 BTC per block to 3,125.
Every halving is both similar and different, but this year’s halving may be unique due to the new spot-traded Bitcoin index funds (ETFs), launched in January, which helped drive the price of Bitcoin to all-time highs, bringing the crypto sector as a whole to close to a market capitalization of US$3 trillion.
This raises yet another question: Given that Bitcoin ETFs appear to have opened the eyes of many institutions to Bitcoin as an alternative asset, will the April halving accelerate the trend?
Some think so. “Institutions are still learning about this asset class, but understanding Bitcoin’s monetary policy will only generate more interest,” Dante Cook, head of business at Swan Bitcoin, told Cointelegraph.
The halving is an important demonstration that “Bitcoin security can continue despite a smaller ‘security budget’,” Ethan Vera, chief operating officer at Luxor Technology Corporation, told Cointelegraph, adding:
“We expect there to be continued institutional interest in both the underlying commodity and also companies operating in the space, such as miners.”
For institutions looking to buy the coin itself, halving the block reward is arguably an incentive, added Joe Nardini, senior managing director at B. Riley Securities. This is further proof that the BTC supply will not inflate, which is a “positive point” for many potential institutional investors, Nardini told Cointelegraph.
However, not everyone agrees that the halving alone will bring large corporations or financial institutions contemplating crypto into the Bitcoin universe.
“The halving should not have an impact on whether large corporations/institutional investors will invest in Bitcoin for the first time,” Ruben Sahakyan, director of investment banking at Stifel Financial, told Cointelegraph.
Investors have clearly embraced Bitcoin ETFs in the spot market — as seen by net inflows — and more regulatory clarity will help boost industry adoption and the investor base, Sahakyan continued. “However, some investors are on the sidelines when it comes to investing in mining stocks as they wait for the impact the halving will have on miners’ profitability and volatility is reduced.”
Others have suggested that halvings may not be what they used to be, i.e. full of drama.
“The halving is probably not as big an event as the industry is well prepared and has been deleveraging in anticipation of potentially reduced savings,” Taras Kulyk, founder and CEO of SunnySide Digital, an infrastructure provider, told Cointelegraph. “Additionally, the massive growth of L2 technologies on top of the Bitcoin Network has increased transaction fees — further cushioning the impact of the halving.”
A “halving-induced” surge?
Historically, the price of Bitcoin has risen in the months leading up to a halving, which is happening again in 2024. In fact, a JPMorgan analyst in late February referred to a “Bitcoin halving-induced euphoria” that is taking over the market. of crypto. But is this really the case?
“There are two main narratives and drivers for Bitcoin currently,” Chris Kuiper, director of research at Fidelity Digital Assets (FDA), told Cointelegraph. The first is the recent approval of Bitcoin ETPs [exchange-traded products] in the spot market, which was an important milestone in the history of Bitcoin and an ongoing path to adoption.”
The second, Kuiper continued, is the imminent halving. “As in the past, there is expected to be little effect on the Bitcoin network itself. We may see an initial drop in the hash rate, but it will probably only be a matter of time before it recovers to its previous levels and rises again, which would not affect the operation of the network.”
Which of these two events is more impactful? We don’t know if the price increase is a result of the halving or ETF approvals
Which of these two events is more impactful? We don’t know whether the price increase is a result of the halving or Bitcoin ETF approvals in the spot market, said B. Riley Securities’ Nardini, but it is more likely to be “ETF-induced,” in his opinion.
The JPMorgan analyst also warned that the price of Bitcoin could fall to $42,000 after the halving. This would also follow the script of previous halvings. The hash rate — the total computing power of the network — is what makes the Bitcoin network more secure. In the last three halvings (2020, 2016 and 2012), the hash rate initially fell but quickly recovered within six to 31 days.
What is different today from historic halvings are ETFs, which have dramatically changed the Bitcoin ecosystem,” Clark Swanson, entrepreneur and former CEO of Bitcoin mining firm Blockcap, told Cointelegraph.
The new ETFs have created a “demand shock to Bitcoin’s limited supply,” Swanson said. This “will drive prices further and mitigate some of the market forces that have traditionally presented challenges to miners.”
“After the halving, there will be exactly 50% less Bitcoin produced — or available for sale — while ETF demand appears to remain, which should continue to drive volatility,” agreed Sahakyan. “Some of the miners have started to accumulate BTC balances again, which further reduces the available supply of Bitcoin.”
Others, however, anticipate some surprises. Aki Balogh, co-founder and CEO of DLC.Link, told Cointelegraph that “the supply shock that will come from reduced mining revenues is real and will have some effect.”
Something has already been priced in, “but there are unknown secondary and tertiary effects that will only appear after the halving has taken place,” continued Balogh. Still, “I think the shortage will push the price up a bit.”
In the long term, history suggests that the hash rate will recover, and the price of Bitcoin will continue its rise to new heights. Halving is a unique situation where the block reward decreases periodically, and in this way, “the network inflation rate is pre-coded,” said Vera. “Historically, we have noticed that the decrease in the issuance of new Bitcoins has a positive impact on the price.”
Why BTC proxies?
What about traditional BTC proxies like MicroStrategy and some of the biggest BTC mining companies? Will they do better or worse when the dust settles from the 2024 Bitcoin halving?
Economically speaking, halvings primarily influence the supply of BTC, Balogh said, while “ETFs, MicroStrategy’s well-publicized purchases, and even El Salvador’s daily BTC purchases impact the demand side .” Spot market ETFs will likely affect Bitcoin proxies like MicroStrategy more than the halving. Added Balogh:
“Will MicroStrategy continue to serve as a proxy for BTC, given that one can buy BTC directly in an ETF? Probably a little less than before. It is cleaner to buy an ETF than a stock controlled by a Board of Directors with unknown objectives.”
On the other hand, MicroStrategy recently rebranded itself as a Bitcoin development company, he continued, while the new ETFs “are capital inefficient in the sense that the BTC just sits there.” Investors may prefer Michael Saylor’s more active management strategy compared to ETFs.”
Cook, for his part, predicted that there will be no diminution in MicroStrategy’s role as a proxy for BTC after the halving. “MicroStrategy shares are up nearly 450% in the last year and more than 250% in the last six months. It is one of the ways institutions will seek to gain exposure to the Bitcoin asset class,” he told Cointelegraph.
How will miners fare?
What about the prospects for miners? After all, they are the ones most directly affected.
“Each mining rig has its own profitability point,” Fidelity’s Daniel Gray noted in a recent blog. “Each trade will be going into this event assuming they have enough reserves on hand to withstand the negative pressure of the halving.”
Perhaps the global BTC mining sector today is larger and more stable than in previous years.
“The mining sector as a whole has matured since the last halving and is significantly better positioned, but some will struggle unless the [BTC market] price continues to rise as network difficulty continues to increase amid orders of outstanding machines,” said Stifel’s Sahakyan.
“It appears that miners are in better shape overall in terms of lower debt levels and potentially better control over their costs such as electricity,” Kuiper added. “What is also helping miners in this cycle is the price appreciation before the halving — something that was also not seen in previous cycles.”
However, “for the smaller miners, it will be difficult,” Nardini predicted. They may need to raise capital. Publicly owned mining companies, by comparison, will generally have an easier time raising capital.
Since the start of 2024, Bitcoin miners with a peta hash of mining equipment can count on earning around $115 per day, Vera told Cointelegraph, which is “a significant improvement since the beginning of the year given the recent price movement,” but still:
“With the halving approaching and relentless network hash rate growth, certain miners will be at risk of negative post-halving profitability.”
Many miners see what’s coming — ever-smaller block rewards — and are looking more at supplemental revenue opportunities. “Transaction fees on the Bitcoin network are crucial for miners in the long term,” said Vera, “and we are seeing many begin to invest time and capital into developing the ecosystem of applications being built on Bitcoin.”
As important as ETFs?
If we compare the introduction of Bitcoin ETFs to the spot market in January with the quadrennial Bitcoin halving in April, which event will posterity consider more consequential?
Few this past week were willing to say the halving. The halving is “second in importance to ETFs,” Nardini said flatly.
Still, halvings are unique to Bitcoin and represent a kind of advertisement for what is good and lasting about the cryptocurrency (e.g., it is “sound money”), as well as some of the attendant risks like falling hash rate.
From an adoption perspective, it’s important for people to see that Bitcoin’s “monetary policy” is once again performing as scheduled and expected, Kuiper said, “and this can again reinforce to investors that Bitcoin, as a asset, is becoming increasingly scarce compared to other financial assets, commodities or currencies.”
Or, as Swanson noted:
“It’s Bitcoin’s finite supply and halving, which are features that help make Bitcoin the most solid money ever created.”
For that reason, he added, “it may also be the first man-made money to survive more than 200 years.”
