The worlds of cryptocurrencies and precious mineral deposits may seem distant, but in the world of cryptocurrency, they are closely related. As the highly anticipated bitcoin halving approaches this week, discussions about blockchain mining and the role of miners in sustaining the bitcoin ecosystem are increasing. This “invisible” aspect of the cryptocurrency, which allows for the creation of new tokens, will see a reduction in profits, as it has in the past in 2012, 2016, and 2020. However, this does not necessarily mean a decrease in the price of the cryptocurrency. In fact, the market expects the reduction in supply to increase demand and result in a higher price, as it has already increased by 50% this year.
With the price of bitcoin already reaching over €65,000 ($69,150.25) and gaining popularity through the success of exchange-traded funds, it is important to understand the significance of this milestone for a sector that has been trying to recover from a long winter.
What is halving and why is it important?
Halving is a result of the blockchain technology behind bitcoin. In order to create new currency, the system requires computers, or miners, to verify transactions. These miners are rewarded with a certain amount of digital coins. Since 2020, these miners have received 6.25 bitcoins for every 210,000 verified blocks. However, after the halving, they will only receive half of that amount, 3.125 BTC.
Mireya Fernandez, head of the Bitpanda exchange for southern Europe, explains that this is similar to what happens with a deposit of a precious mineral. In the beginning, there is confusion and the first miners are paid well. But as time goes on, the availability of the mineral decreases, resulting in a higher price.
The reduction in rewards for miners is a fundamental aspect of bitcoin’s supply and demand. Despite being a digital currency, bitcoin cannot be created infinitely and its value is based on its scarcity. This makes it attractive in countries with high inflation rates, such as Argentina and Nigeria. The maximum number of bitcoins that will ever exist is 21 million.
Why is this milestone important for investors?
Experts agree that the sector is entering a period of consolidation and maturation, driven by new investment products and the participation of large institutional players. Guido Lonetti, product director at digital bank N26, notes that bitcoin is experiencing a renewed popularity due to regulatory and market access developments.
After a period of fraud and falling prices, any positive news is welcomed by bitcoin investors. However, this also means that any news, whether good or bad, can result in a significant influx or outflow of capital. But as Jorge Soriano, head of the Criptan platform, points out, it is important not to be too vigilant as the issuance schedule for bitcoin has been known since the beginning. The currency’s properties and characteristics go beyond this one-time milestone.
How will this milestone affect the price?
This is the question on everyone’s minds as historical data has shown a significant increase in price after previous halvings. In 2012 and 2016, the halving led to a price increase of almost 10,000%. For example, before the halving in November 2012, the currency was trading at around $10. Just five months later, it reached over $200. The price continued to rise and eventually reached over $1,000 by the end of that year.
However, in 2020, the increase was not as significant, only reaching 400%. This could be attributed to the context at the time, which was shaped by the pandemic, lack of regulation, and historically low interest rates. But as Fernandez summarizes, the community is more mature now with more experience and capital.
The most skeptical voices argue that there is no causality between the halving and an increase in price, only a correlation. This does not discourage the more optimistic voices in specialized forums who predict that the price of bitcoin could reach $435,000 by the end of 2024. Manuel Villegas, digital assets analyst at Julius Baer, believes that the halving could serve as a catalyst for a new growth cycle in the cryptoasset market.
Will this milestone have any effect on ETFs?
Analysts suggest that the effects of halving will crossover to ETFs. As the price of bitcoin rises and the fear of missing out (FOMO) increases, there may be a greater interest in accessing bitcoin through exchange-traded funds. At the same time, the existence of these investment vehicles also means that the price of the cryptocurrency is not as volatile as it was in the past, especially with the participation of institutional players who are not as concerned about volatility.
Halving could indirectly impact investment portfolios, as there are several funds in the U.S. market related to the crypto industry. For example, the Valkyrie Bitcoin Miners ETF (WGMI) invests in companies involved in mining bitcoin. In a more competitive environment among miners, smaller players may disappear, resulting in a potential benefit for this fund.
Other factors to consider in this context
The market is also closely watching two related news items. The first is the success of large fund managers in promoting bitcoin exchange-traded funds launched earlier this year. It is worth noting that in 2017, BlackRock CEO Larry Fink referred to bitcoin as a “money laundering index,” but now he is a strong believer in the cryptocurrency. BlackRock’s iShares bitcoin fund manages over $16 billion, almost 30% of the total capital in these investment vehicles.
Another development to watch for is the potential approval of an Ether ETF by BlackRock. The company is among many others that have requested approval from the U.S. regulator for this type of fund. While we may not see the same frenzy as earlier this year, it would signal a change in attitude from authorities who, while still cautious of crypto assets, are seeking to establish clearer regulations.
Lastly, the monetary policies in the United States and Europe will also have an impact. A potential decrease in interest rates could lead to increased interest in riskier investment options, such as cryptocurrencies.
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