What is Bitcoin halving?

Introduction

Each four years, the reward for ‘mining’ a new block of Bitcoin decreases by half. At the launch of the now-famous cryptocurrency in 2009, the reward for Bitcoin ‘miners’ – in reality solvers of cryptographic puzzles to validate one block of blockchain transactions – was set at 50 Bitcoin, but with the built-in feature of that reward halving after every 210,000 blocks mined. In practice, this works out to a halving roughly every four years, with halving events in November 2012 (making the reward 25 Bitcoin), July 2016 (12.5), May 2020 (6.25) and shortly, in April 2024, 3.125. This is part of the strategy of successively restricting supply of Bitcoin as the number mined approaches 21 million. Bitcoin halving is normally seen as a positive event for the overall market, but as always with cryptocurrencies the impacts are unclear and all that can be said for sure is that volatility around the next halving event will be high.

Bitcoin mining

Bitcoin mining is the name given to the process whereby transactions are included on the blockchain , a distributed ledger that contains, publicly, the transaction history of Bitcoin transactions, divided into blocks. A reward is offered to the first miner to solve an algorithmic problem (in effect it involves guessing a very large number) for each block, and this provides an incentive for Bitcoin miners or ‘nodes’ on the network to validate transactions, which protects the integrity of the blockchain. Because the problems become progressively more difficult, the hardware requirements to mine successfully have grown to the point where only banks of powerful GPUs, sometimes requiring their own independent power source, will allow consisted profitable mining.

Fixed supply

One of the key features of Bitcoin  is the fixed limit to the number of coins. This was intended to solve one of the perceived weaknesses of state-backed fiat currency, the ability to inflate away its value by governments producing money ex nihilo. This practice is sometimes called ‘printing money’, though in reality cash produced this way is very rarely printed, instead normally being produced via Quantitative Easing, where a government buys its own bonds. These practices decrease the value of the currency by increasing the money supply, and are strongly disapproved of by many ideological backers of cryptocurrencies.

In order to avoid this problem, Bitcoin has a fixed number of 21 million coins that can ever be mined, and the halving process is designed to increase the cost (and hopefully value) of each Bitcoin before that point is reached. The idea is that scarcity will drive up the price of Bitcoin, making mining a profitable activity even after continuing halving events reduce the reward for mining each new block. So far, previous halving events have been associated with Bitcoin price increases, though they are not seriously out of line with the price action seen in normal trading, so far as normal trading conditions exist for such volatile assets.

Market impacts

Cryptocurrency markets are notoriously resistant to fundamental analysis, and should be treated with extreme caution due to their volatility, as traders have suffered considerable losses trading them in the past. That makes analysing the potential impact of Bitcoin halving 2024 difficult, if not impossible. The theoretical constraint to supply has a far lesser impact than the actions of speculative traders, and though the general consensus remains that halving is good for prices this is by no means a reliable response. In fact, whatever the initial reaction of Bitcoins next halving event, it is very likely the market response will see corrections and counter-corrections as traders change their positions in the ensuing volatility.

The next Bitcoin halving will be the last for the next four or so years, but these events will continue until the reward level is reduced to a single Satoshi, or one-hundred-millionth of a single Bitcoin. A Satoshi is the smallest indivisible fraction of a Bitcoin, and the final block reward will consist of a single Satoshi bringing the total of mined Bitcoin to 21 million. Because the algorithmic puzzles used to mint new blocks become progressively harder and harder, the hardware requirements are steadily more and more extreme, leading some analysts to conclude that the last few Bitcoin will never be mined.

Further analysis of market impacts

Bitcoin Cash is a similar currency to Bitcoin that was born out of a 2017 fork from the overall Bitcoin blockchain has also experienced halving events, since it works on a very similar protocol to the better-known rival. Bitcoin Cash’s halving events have seen sustained price increases, with the increased coverage of the coin and trading volumes driving it to new highs. This is a bullish signal for Bitcoin’s own halving, but should also sound a note of caution: Bitcoin remains by far the largest cryptocurrency, but it could lose market share in the future to newer coins. How this would impact prices, and whether miners are interested in moving to easier-to-mine new alternatives, potentially impacting the stability of the blockchain, is not yet clear.

How can I trade the Bitcoin halving in 2024?

The 2024 Bitcoin halving event has been the subject of a great deal of speculation, but it is not clear how much real market impact will follow. Bitcoin CFD traders should expect significant volatility as the date approaches and in the following days, likely with a prevailing uptrend but no doubt buffeted by significant downswings as traders close long positions and reassess their long-term price forecasts.

Remember that Bitcoin is significantly influenced by overall risk sentiment in wider markets, and usually crashes or rises with the overall stock market. The long-term price trajectory of Bitcoin also depends on how far it is able to stay out from under the influence of major financial regulators; the profitability of crypto stocks as well as the prices of individual cryptocurrencies could be significantly altered if the market ends up being regulated as tightly as the wider financial sector.

With those caveats made, it’s time to look at how traders can profit from price moves in Bitcoin. ADSS CFD traders are able to share in Bitcoin price action using different products, including CFDs on Bitcoin ETFs, on Bitcoin directly, or on Bitcoin mining stocks such as RIOT.

CFDs on Bitcoin

ADSS CFD traders can open CFD positions on Bitcoin with leverage [A1] of up to 4:1, alongside other popular coins including Bitcoin Cash, Litecoin and Ethereum. This is the most direct way of trading CFDs on cryptocurrencies and allows traders to rapidly open long or short positions on these volatile assets.

Conclusion

Bitcoin halving events are not massive market events and it shouldn’t change your long-term price view on the cryptocurrency. However, it is a widely publicised event and CFD traders dealing in the run-up and aftermath of the next Bitcoin halving will experience increased volatility. The fundamental logic of reward restriction is bullish for Bitcoin, but bear in mind these trends take place over a longer timescale than most CFD traders maintain positions for. Also, there is the potential risk that diminishing rewards will see miners lose interest in Bitcoin, perhaps leading to it losing crypto market share to other coins.

All of these is speculation, but it’s important to be aware that the market can interpret events in a number of different, sometimes contradictory ways. If past events are any guide, then its likely prices will rise through the event, but for intraday CFD traders the overall volatility could easily knock out long positions on the way, so extreme caution, as always valuable in crypto markets is necessary, and the appropriate risk management strategies must be in place before trading.

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