In this article, we will generally analyze the effect of the BTC halving on the cycles of the financial market of blockchain technology. It is crucial that you know this information before investing in this market.
A) What is the BTC halving?
B) How many halvings have there been?
C) How have halvings influenced the price of BTC?
D) Market cycles.
E) When is the next BTC halving?
F) Conclusion.
What is the BTC halving?
In very simple terms, a BTC halving occurs when the rate of creation of new BTC is cut in half; that is, suddenly the amount of BTC that is issued is divided by 2, which leads to fewer BTC being created than before, reducing the supply of new coins. This event occurs approximately every 4 years and is predetermined in its source code. It is a decentralized event that does not depend on any government or company. It should be noted that the issuance of BTC is limited; only 21,000,000 will ever exist, and currently, there are approximately 19,300,000 in circulation.
More technically, the halving is an automated process of halving the BTC that miners receive as a reward for creating a block on the BTC blockchain. The new coins in circulation are the reward to miners for providing significant computing power to verify and validate transactions of this network in a decentralized manner. The BTC halving occurs every 210,000 mined blocks (a block is created approximately every 10 minutes, so 210,000 blocks take about 4 years).
To understand this, it is essential to recognize that instead of having a centralized database, blockchain technology uses a decentralized network of nodes (miners) to store and verify information. Each data block in the chain is cryptographically linked to the previous block, creating a chain of interconnected blocks (blockchain) that contains verifications and transactions validated among the various nodes (miners) distributed around the world. The following images illustrate this:
It is a disruptive technology linked to the issuance and transfer of value between internet users, functioning on a peer-to-peer basis without a centralized entity acting as intermediary. For further illustration, visualize the following image:
If you want to deepen your understanding of how BTC mining works, visit the following pages: https://academy.bit2me.com/mineria-bitcoin-como-se-crea-un-bloque/ and https://academy.bit2me.com/que-es-un-nodo.
How many halvings have there been?
So far, there have only been 3 BTC halvings:
The chart reflects that nowadays, approximately every 10 minutes, 6.25 new BTC are created - issued, which can be sold or hoarded by the miners who earn them. Starting in 2024, in the fourth halving, this creation - issuance will instantly decrease to 3.125 BTC.
A total of 33 BTC halvings will occur; the last one will happen approximately in the year 2140. In the following image, the first halving is represented with the number 2:
It is important to note that after the last halving, all 21,000,000 BTC will have been issued, and the only profit miners will have will be from the commissions for validating transactions that occur on their blockchain.
Thus, everything mentioned causes BTC to be a deflationary asset. More specifically, broadly speaking, there are three main factors that cause this: 1) The limit set on the total number of BTC that will be in circulation (21,000,000). 2) The halving of the rate of creation of new BTC (caused by its halving). 3) The systematic hoarding of BTC, both institutional and individual, caused by its international adoption and acceptance (leading to fewer being in circulation, because they are not moved from the wallets where they are stored).
Furthermore, it should be noted that this deflationary process of BTC runs completely counter to the monetary system carried out by the Central Banks of the major economic powers, which depend on the permanent printing of new money to stimulate their economies, in addition to having no limit on the amount they can issue. Every 4 years, there is more new fiat money in circulation, but a lesser quantity of new BTC - the supply is reduced due to the halving - while demand increases due to the unique qualities it possesses.
In this article, I have only developed some of these qualities; I will continue explaining others in future articles.
How have halvings influenced the price of BTC?
Remember that halvings caused a reduction in the supply of new BTC. Let’s observe what happened with its price after each halving:
First Halving
The first halving occurred on November 28, 2012, when the price of BTC was 12 USD. 13 months after this event, on December 4, 2013, its price was 1,235 USD:
Second Halving
The second halving occurred on July 9, 2016, when the price of BTC was 640 USD. 17 months after this event, on December 16, 2017, its price was 19,290 USD:
Third Halving
The third halving occurred on May 11, 2020, when the price of BTC was 8,619 USD. 18 months after this event, on November 8, 2021, its price was 67,500 USD:
During the period between the mentioned dates, there were other fluctuations in its price; here I only take the days illustrated in the graphs as a reference. BTC has progressively risen since its halvings.
As you can see, so far, after each halving the price of BTC has appreciated, but as new halvings occurred, the increase occurred at a lower percentage. The first halving caused the largest price increase, and the last one the smallest (in percentage terms).
Market cycles.
First of all, it should be clarified that the financial market of blockchain technology is much more than BTC; it all started with it, but it is a First Generation blockchain. Currently, this technology has evolved, and there are new assets (tokens, NFTs, among others), as well as cryptocurrencies from new Second and Third Generation blockchains, in which the so-called Smart Contracts can exist and be utilized (contracts smart).
Having clarified this, it should be noted that the BTC halving not only produced a price increase in this cryptocurrency but also affected the new assets mentioned. For example, I invite you to see the ETH (Ethereum) chart on the same dates mentioned earlier in the graphs (only the dates of the second and third halvings, as the first one did not yet exist).
This happened because the appreciation of BTC made the blockchain technology financial market more attractive to individual and institutional investors and led to more capital flowing into the market, being distributed among those assets that caught more attention depending on their characteristics. This does not mean that all assets rose; on the contrary, with more inexperienced users, many scams and thefts arose. Therefore, it is necessary to know what, how, and why to invest, conducting the necessary intelligence tasks.
These significant rises and corrections in the market, in very broad terms, are divided into 2 cycles: “Bull Market” (Bull Market) and “Bear Market” (Bear Market). After each halving, a Bull Market occurred that lasted approximately 13-18 months, and then a Bear Market, until the next Bull Market after the new halving.
For example: BTC rose from the day of its second halving in 2016 from 640 USD to 19,290 USD in 2017 (Bull Market), then during the years 2018, 2019, and early 2020 did not return to previous highs (Bear Market), but after its third halving in May 2020, it rose from 8,619 USD to 67,500 USD in 2021 (new Bull Market). Currently, we are in a new Bear Market where we should not see the price of BTC at historical highs (2022, 2023, and early 2024).
This does not mean that it is only worth investing in this market after each halving. In bearish contexts, opportunities also arise; for example, BTC in 2019 rose from 3,400 USD to 13,000 USD, this is called Bull Rally in a Bear Market, as is currently happening from 15,400 USD to 28,000 USD.
Furthermore, there are always assets that have a demand independent of the market context and even today due to the large daily trading volume in USD (it recently happened with tokens linked to Artificial Intelligence and those that carried out Airdrops). Likewise, it depends on what circumstances you bought the asset, whether in the market or its public or private presale (ICO, IEO, or IDO), among other factors. Nevertheless, the BTC halving has proven to be extremely important for seeing the prices of the assets in this financial market reaching new historical highs.
In this way, a Bull Market mostly causes the prices of many financial assets in blockchain to be overvalued and a Bear Market tends to make these assets undervalued. The latter can be a good time to accumulate depreciated high-quality assets, making these investments for the medium-long term (1-3 years between purchase and use - depending on what it is - and then ...Sell it in the Bull Rally of the Bear Market or in the upcoming Revalued Bull Market, and the former can provide a good context, with excessive trading volume in USD, for making investments in the short to medium term (days, weeks, months, or 1 year) more safely, provided that it is properly researched and risks are well managed. I clarify that what is mentioned is in very general terms; there are many different types of investments depending on the context we find ourselves in.
On the other hand, Bear Markets tend to wipe out all companies in the sector that did not manage their funds well or did not carry out the due diligence to survive, and those that do survive in this context are the ones that have the greatest growth perspective in the medium to long term, especially in a bullish trend. The market cleans itself, leaving only the highest quality companies with undervalued assets, as is happening in the current Bear Market. Obviously, the supply is enormous; therefore, it's essential to thoroughly analyze what to invest in and diversify.
Additionally, beyond the peculiarities of this market, one must also consider the external situations that affect the price of these assets positively and negatively. For example: the current international economic crisis, the increase or decrease in interest rates by the FED in the US, quantitative easing carried out by Central Banks, the regulation of this new financial sector, among others.
When is the next BTC halving?
The fourth BTC halving is expected to occur around April 2024.
If you want to see live how many blocks and days are left until the next halving, visit the following page: https://academy.binance.com/es/halving.
Conclusion.
First of all, it's important to highlight that past performances do not guarantee future returns, but they are a good indicator for determining a probability percentage that it will happen again.
Thus, considering how the price of BTC reacted after each halving, combined with the significant current fundamentals surrounding it and its great institutional and international adoption in recent years, perhaps the history will repeat itself in the fourth halving of 2024. It is not known for sure, but one must be prepared and have the appropriate knowledge in case a new bullish trend towards new all-time highs (overvalued) is observed. Likewise, one must stay informed about the external situations that may arise.
I also highlight that each reader must decide whether or not it's worth investing in Bitcoin or another asset in the short, medium, or long term, should they consider them undervalued. What is presented here is not an investment recommendation; everyone must conduct their own research and come to their own conclusions. Here, only one indicator was taken into account, but there are many more (dozens) to manage risks well when entering the market. Always invest prudently, with a buying strategy and a selling strategy.
Investments here are highly volatile and risk-prone, particularly for new users who are susceptible to falling for scams or thefts and/or buying at new all-time price highs only to sell during a large correction, causing enormous losses.
The worst mistake one can make in this market is to be impatient and let greed or fear take over.
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