The Bitcoin Halving: What is it and why does it matter?

Opinion piece

Charlie Sherry, Head of Finance at BTC Markets.

The Bitcoin halving - often mentioned but what is it and why does it matter and will Bitcoin 10x after this year's halving (just a little clickbait)?

So as most people know, (except for Jamie Dimon) the total issuance of Bitcoin is fixed. Today, about 19.64m Bitcoin are in circulation with a max supply of 21m. Bitcoin is issued through the process of mining, miners validate transactions on the Bitcoin network, and are rewarded with Bitcoin (current mining rewards are about 6.25BTC per block). So, since Bitcoin's inception, years of mining has resulted in 19.64m of supply. And every 4 years the rewards for miners are cut in half (the halving). As you can see in the first image, this has a significant reduction in mining rewards over time.

From a market and price point of view the halving achieves 2 things. Firstly, it reduces the currency's inflation and maintains scarcity. Theoretically, if demand remains level, BTC price will increase due to a reduction in issuance. BTC currently has an inflation rate of around 2%, compared to global inflation rates this is low. So, by halving the rewards the inflation of BTC is reduced and scarcity is increased - good for price action.

The second, and probably more significant effect of the halving is the attention it brings to Bitcoin. The mainstream media and general public have been conditioned to pay attention to the halving as a crucial event in the lifecycle of BTC, and if we look at price over previous cycles, that is certainly supported:

I've charted below the 3 previous Bitcoin halving dates and the BTC price performance post halving.

- November 2012 - 100x in price over the subsequent 13 months
- July 2016 - 30x over 17 months
- May 2020 - 7.5x over 19 months

As we can see, halving cycles have historically been significant drivers of price over the next 12-18 months. However, one takeaway is the rate of performance has diminished with each halving. This makes sense given the market has only grown and become more liquid over time, each percentage point gain requires more capital inflows than previous cycles, and the rate of halving diminishes each cycle slightly weakening the narrative.

Also, I am not attributing the price movement post halving purely due to the fact there was a halving, there are other elements at play such as the macro conditions in 2020 etc.

So with that said, what is the outlook for BTC post halving in 2024? If prior years are to go off, perhaps we can expect a continued price run, but maybe not to the same extent we have seen in previous years. The macro conditions are also not as favourable as prior cycles. But we do have the demand inflows of the BTC ETF and the ever-increasing acceptance of Bitcoin as a viable investment, except from Jamie of course.
Where we end up will only be obvious in hindsight, as it always is in markets, but I look forward to reflecting again in 4 years’ time.

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