Bitcoin's fourth halving is less than one year away. This recurring event has historically been a bullish catalyst for the popularization and rise in bitcoin's prices.
Halving refers to the planned reduction of newly issued Bitcoins (BTC) that are created and distributed to miners performing verification and validation of transactions on the network. It is built into the Bitcoin program code to prevent the total number of coins in the network from exceeding 21 million units.
The initial halving took place in November 2012, reducing the block reward, which is the number of Bitcoin that miners received for verifying each block of transactions, from 50 BTC to 25 BTC. The second halving occurred in July 2016, as the reward went down from 25 to 12.5 BTC. The third and ultimate (at the moment) halving occurred in May 2020, which decreased compensation from 12.5 to 6.25 BTC.
The subsequent halving of Bitcoin is anticipated to transpire in April 2024. The block reward will decrease to 3.125 BTC, lowering Bitcoin's annual inflation rate from 1.7% to 0.8%.
The last halving event will occur in 2140, precisely when the final Bitcoin is mined and the entire coin supply reaches 21 million.
Bitcoin distinguishes itself from other cryptoassets by following a unique monetary policy that avoids inflationary pressures. For example, Dogecoin (DOGE) maintains a 2-3% inflation rate and Solana (SOL) exhibits a long-term inflation rate of 1.5%. The inflation rate of Ethereum became negative when the blockchain migrated to the Proof-of-Stake (PoS) algorithm. This occurred because the transaction fees that were burnt on the network surpassed the number of newly issued ETH coins. Halving events are not exclusive to Bitcoin; other cryptocurrencies that operate on the Proof-of-Work (PoW) algorithm, such as Litecoin (LTC) or Zcash (ZEC), are also subject to those.
How Does the Halving Affect the Price?
By analyzing the price dynamics of Bitcoin's three halving cycles during a two-year span, starting one year before each halving and ending one year after it, one can predict Bitcoin's price trajectory leading up to the fourth halving. In the last two periods, Bitcoin experienced an appreciation of approximately 30,000% in 2012, 786% in 2016, and 712% in 2020. If Bitcoin shows the same indicators as those in the previous halving cycles, its price in 2025 could potentially increase to $220,000.
However, past performance cannot guarantee future results, and numerous factors affect the Bitcoin price. As Bitcoin evolves and penetrates the market, its value can become more consistent and less volatile.
Moreover, halving is expected to reduce the sales pressure on prices, especially for miners. Miners are the most reliable sellers of Bitcoin, as they must cover the expenses of their operations by exchanging newly mined Bitcoin for fiat currency. Each halving eases the structural sales pressure, and if the demand remains steady or grows, the price should correspondingly increase.
What Is the Stock-to-Flow Model
The stock-to-flow (S2F) model is a predictive model that measures the scarcity of an asset by comparing its available stock (existing supply) to its flow (newly produced supply). The S2F model has been applied to Bitcoin by PlanB, a pseudonymous analyst, to predict cryptocurrency price movements. In the context of Bitcoin, the S2F model considers halving events that occur approximately every four years. During halving, the block reward for Bitcoin miners is cut in half, reducing the rate at which new Bitcoins are created. This leads to a decrease in the flow of new Bitcoin and an increase in the stock-to-flow ratio.
The S2F model suggests that, as the supply of Bitcoin becomes scarce due to halvings, its price should increase. This is because Bitcoin is treated as a "store of value" commodity, similar to gold or silver, which retains its value over time because of its relative scarcity.
Experts use the S2F model to predict Bitcoin's price after 2024 halving by observing the projected stock-to-flow line, which can be calculated based on the approximate mining schedule of future Bitcoin production.
The S2F model has shown accuracy in predicting Bitcoin's price movements between 2015 and late 2021.
The next halving in 2024 is expected to double Bitcoin's stock-to-flow ratio, potentially leading to a significant price increase.
The S2F model suggests that Bitcoin's price could reach as high as $1 million or more in the future, although these are just predictions, and the actual price may differ.
While the S2F model has gained traction and is still considered relevant by some analysts, it is important to note that it is not a foolproof method for predicting Bitcoin prices. Market dynamics, investor sentiment, and other factors can influence the value of cryptocurrencies.
Potential Risks
Investing in Bitcoin up to the 2024 halving event comes with risks, as with any investment. However, there are some potential risks to consider.
- Volatility: The prices of cryptocurrencies, including Bitcoin, are highly volatile and can fluctuate rapidly due to external factors such as financial, regulatory, or political events. This volatility can lead to significant gains and losses for investors.
- Uncertainty: While many experts predict that Bitcoin's price will increase after the 2024 halving, there is no guarantee that this will happen. Some analysts suggest that halving may not necessarily lead to a bull run. Therefore, investing in Bitcoin solely based on predictions and speculation can be risky.
- Regulatory risks: Bitcoin and other cryptocurrencies are subject to regulatory risks as governments around the world continue to grapple with how to regulate this emerging asset class. Changes in regulations and government policies could impact BTC prices.
- Security risks: Bitcoin is a digital asset stored in wallets, which can be vulnerable to hacking and theft. Investors should take precautions to secure their Bitcoin holdings, such as using reputable exchanges and wallets and implementing strong security measures.
- Market risks: Bitcoin is not immune to market risks such as changes in investor sentiment or shifts in market dynamics. These factors can affect the price of Bitcoin, and investors should be prepared for potential market downturns.
Investing in Bitcoin leading up to the 2024 halving event requires careful consideration of potential risks and rewards. Investors should conduct thorough research, diversify their portfolios, and invest only in what they can afford to lose.
Summary
Bitcoin's fourth halving is expected to occur in April 2024, reducing the block reward to 3.125 BTC and lowering the annual inflation rate to 0.8%. This event, which has historically been a catalyst for the popularization and rise in Bitcoin’s price, was built into the Bitcoin program code to prevent the total number of coins on the network from exceeding 21 million units. By analyzing the price dynamics of Bitcoin's three previous halving cycles, we can predict that its price in 2025 could potentially soar to $220,000 if it follows the same indicators as before.
Past performance does not guarantee future results, and numerous factors can affect the Bitcoin price. As Bitcoin evolves and penetrates the market, its value could become more consistent and less volatile. One of the main effects of halving is the reduction in sales pressure on prices, especially for miners. Each halving eases the structural sales pressure, and if demand remains steady or grows, the price should correspondingly rise. This, combined with Bitcoin's unique monetary policy, which avoids inflationary pressures, sets it apart from other cryptocurrencies.
Investing in Bitcoin leading up to the 2024 halving event comes with risks such as volatility, uncertainty, regulatory risks, security risks, and market risks. Investors should carefully consider these potential risks and rewards, conduct thorough research, diversify their portfolios, and invest only in what they can afford to lose.
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