The past decade has been fantastic for Bitcoin, with more and more people accepting its use and believing in its goals of financial inclusion and empowerment. However, we must keep in mind that there is a limit to the supply of Bitcoin, and there is a limit to how quickly we can approach that limit. To achieve this, Bitcoin’s developers devised the Bitcoin halving , also known as the “halving”.
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What is Bitcoin Halving?
Those who verify transactions on the Bitcoin blockchain are rewarded with newly minted Bitcoins. After 210,000 transactions (roughly every four years), the number of bitcoins minted is cut in half, known as the bitcoin halving.
When Bitcoin first came out, miners were rewarded with 50 BTC for validating each block. In 2012, the reward was reduced to 25 BTC, 12.5 BTC in 2016, and 6.25 BTC in 2020. The Bitcoin halving in 2024 will reduce the reward per transaction block to 3.125 BTC. This Bitcoin halving cycle will continue until the 21 million Bitcoin limit is reached.
Bullish effect on the market
As we will see, every Bitcoin halving brings a pattern. In 2016, the BTC value was $665 before the halving and reached $2,250 a year later. The 2020 halving takes place in May. By the end of the same year, the price of BTC reached $29,000 — the highest price of the year. Therefore, we can safely expect a bull run following every Bitcoin halving cycle.
Why does every cycle bring a bull market? Bitcoin was created according to the law of supply and demand . With each Bitcoin halving cycle, the supply of new Bitcoins gradually decreases. Low supply usually means higher prices.
There will also be a lot of turmoil in the market ahead of the Bitcoin halving date. Google Trends data shows a surge in searches for “Bitcoin halving” ahead of the 2020 Bitcoin halving cycle:
The combination of low supply and all-time high demand has created a new high in Bitcoin prices.
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Bearish part of the cycle
While we’d love to see Bitcoin’s halving cycle as a way for its price to increase, it’s important to note that this boost is only temporary. When the buying spree cools, the market always corrects itself.
Historical data shows that bull markets are followed by bear market conditions lasting about 12 months. The value of Bitcoin, which typically falls sharply, begins to climb again a few months before the next Bitcoin halving cycle.
What are the implications of this for the current market? Simply put, the situation we are currently in is normal. With two years away from the next Bitcoin halving, it’s no surprise that the market is behaving in much the same way as in the past.
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Why is the current Bitcoin halving cycle more bearish than before?
The Bitcoin Fear and Greed Index serves as a social barometer to gauge the mindset of the community. A rise in greed shows people buying frantically, while a high level of fear makes users sell their assets.
Currently, the index shows us a state of extreme fear. Given this state of affairs, it’s not surprising that we’ve seen discussions on forums and the behavior of some speculators. The fear, uncertainty and doubt ( FUD ) created by these factors make the current Bitcoin halving cycle even more bearish.
Printing too much money
Recently, we discussed quantitative easing and its impact on the Bitcoin market. While the goal may be to balance and revive the economy, news of an imminent end to quantitative easing has worried market speculators.
US rate hike
In addition to the previous point, the Fed’s call to raise interest rates has been quicker than expected. The aim is to reduce the cash generated by quantitative easing, and officials are calling for not only faster rate hikes, but higher rates as well .
As interest rates increase, borrowing becomes more difficult, and homeowners with variable-rate mortgages will pay more for the loan.
Inflation
Global inflation due to excess cash could also be a factor. For example, in May 2022, annual inflation in the US hit 8.6% , the highest since December 1981. Among them, energy prices soared (34.6%), food (10.1%), and housing (5.5%).
High inflation and rising interest rates mean that the public has less purchasing power . For ordinary people like us, money is spent on necessities and less cash for investments like bitcoin or stocks.
UST stablecoin fiasco
As a stablecoin, Terra aims to provide users with a cryptocurrency to store funds without worrying about volatility. Surprisingly, the stablecoin Terra plummeted to nearly $0 in value this year.
It’s important to note here that Terra uses an algorithmic stablecoin model, unlike Tether, which backs its tokens with fiat currency held by real banks.
To complicate matters, Terra is sitting on billions of dollars worth of bitcoin, which has investors worried that the project will sell its reserves and flood the market with bitcoin, coupled with Terra’s collapse that has eroded trust in cryptocurrencies, leading to Bitcoin’s price plummeted at the time.
Where are we going?
The current market sentiment is a little nervous, which is also very understandable. We see this sentiment on the Fear and Greed Index and hear it from the naysayers, but none of them take into account the pattern the market has been following.
Barring a major event, Bitcoin will trade sideways until the next halving in 2024 . But don’t worry, there is light at the end of the tunnel. Given the regularity of previous Bitcoin halving cycles, another bull run is likely to come.
What we should pay attention to at this point is to invest according to what you can afford to lose, and in addition, there are risks whenever you invest. Impulsively entering the market just because we see a low price doesn’t do us any good. The best way to do anything is to make sure we have a solid understanding of the product and the market we’re going to enter. Fortunately, with the widespread popularity of blockchain, there are plenty of resources to help newbies.
We still have a lot to learn about Bitcoin as a currency. Thirteen years of history is not enough for a currency to mature, let alone understand it as comprehensively as possible. Fortunately, from the past experience, Bitcoin is not the end.
Originally a mere investment vehicle, Bitcoin has now become one of the most practical options for people with limited access to traditional financial institutions. Bitcoin has been used for fundraising and remittances, and in recent years, even simple transactions like buying a cup of coffee can be done with Bitcoin. Needless to say, Bitcoin is on its way to realizing its potential, and next is how our markets can take advantage of it.
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April 24, 2024
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